Consider Two Companies in a World with No Taxes That

question 66

Multiple Choice

Consider two companies in a world with no taxes that are alike except in borrowing choices.District Corp.has no debt financing,and Energy Corp.uses debt financing.The EBIT for both companies is $2,500,000.District Corp.has 500,000 shares outstanding and pays no interest.Energy Corp.has 350,000 shares outstanding and pays $1,000,000 in interest.What is the EPS for each company?

• A)Both companies have an EPS of $5.71.
• B)Both companies have an EPS of $5.00.
• C)District Corp.has an EPS of $5.71 and Energy Corp.has an EPS of $5.00.
• D)District Corp.has an EPS of $5.00 and Energy Corp.has an EPS of $4.29.

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Definitions:

Security Market Line

A line that represents the risk versus expected return of the market; used to assess the performance of investments compared to the market.

Systematic Risk

The inherent risk associated with the overall market or economy that cannot be eliminated through diversification.

Expected Return

The anticipated return on an investment, calculated as the weighted average of all possible returns with the probabilities of their occurrence.

Recessionary Period

denotes a time of economic decline when the economy reduces its activities significantly, typically marked by decreases in spending and increases in unemployment.