Consider Two Companies That Are Alike Except in Borrowing Choices

question 64

Multiple Choice

Consider two companies that are alike except in borrowing choices. Company 1 has no debt financing, and Company 2 uses debt financing. The EBIT for both companies is $800. Company 1 has 400 shares outstanding and pays no interest. Company 2 has 300 shares outstanding and pays $250 in interest. What is the EPS for each company?

• A) Both companies have an EPS of $2.00.
• B) Both companies have an EPS of $1.83.
• C) Company 1 has an EPS of $2.00 and Company 2 has an EPS of $1.83.
• D) Company 1 has an EPS of $2.00 and Company 2 has an EPS of $1.50.

---

Definitions:

Production Possibilities Curve

A graphical representation that shows the maximum quantity of one good that can be produced for every possible quantity of another good produced, given available resources and technology.

Decreasing Opportunity Costs

A situation in which the opportunity costs of resources decrease as more of a good is produced.

Increasing Opportunity Costs

A situation where increasing production of one good requires larger and larger sacrifices in the production of another good due to limited resources.

Unemployment Rate

The ratio of the complete labor pool that is jobless yet is in active pursuit of employment and prepared to work.