What Happens to an All-Equity Firm's EPS When $1 Million

question 104

Multiple Choice

What happens to an all-equity firm's EPS when $1 million of 20% debt is issued and proceeds used to repurchase two-thirds of the stock if operating income equals $1.5 million and EPS were $2 when the firm was all-equity-financed? Ignore taxes.

• A) EPS increase to $2.60.
• B) EPS increase to $3.00.
• C) EPS increase to $4.80.
• D) EPS increase to $5.20.

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Definitions:

Activity Cost Pools

Groups of related costs that are associated with particular activities, used in activity-based costing.

Direct Labor Costs

These are wages and benefits paid to employees who are directly involved in the production of goods.

Activity Cost Pools

Groupings of individual costs associated with particular activities, used in activity-based costing to allocate costs more precisely.

Cost Analysis Report

A detailed examination of cost elements and their impact on the overall expenses of a business, often used to inform financial decisions and strategies.