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.

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Definitions:

Clan Control

A form of organizational management where control is exerted by promoting a strong culture, shared values, and traditions among its members.

Bureaucratic Control System

A formal system of organization that is based on clearly defined hierarchical levels and roles, with a focus on following fixed rules and procedures to manage operations.

Clan Control

A management strategy that relies on shared values, beliefs, traditions, and norms to influence and control employee behavior, fostering a strong organizational culture.

Organizational Mission

A written declaration of an organization's core purpose and focus that remains unchanged over time.