A Firm Issues 100,000 Equity Shares with a Total Market

question 102

Multiple Choice

A firm issues 100,000 equity shares with a total market value of $5,000,000. The firm's market value of debt is also of equal amount . The firm is expected to generate $1.5 million in operating income and pay $250,000 in interest. Ignoring taxes, this will generate $12.50 earnings per share. What will happen to EPS if the firm's borrowing and interest expense increases by 75% and the number of shares in circulation is cut by 75% (assuming that the share price remains unchanged with this change in capital structure) ?

• A) EPS decreases to $10.00.
• B) EPS stays at $12.50.
• C) EPS increases to $30.00.
• D)EPS increases to $42.50.

---

Definitions:

Stockholder's Equity

What remains of a corporation's assets after liabilities are accounted for, denoting the interest of owners.

Long Term

Referring to assets, liabilities, or investments expected to last, or commitments expected to be active, for more than one year.

Treasury Bonds

Long-term government bonds issued by the U.S. Department of the Treasury, known for their safety and used by investors to diversify portfolios.

Interest Revenue

Income earned by a company from investments it has made in bonds, loans, or other interest-bearing assets.