Consider Two Companies in a World with No Taxes That

question 19

Multiple Choice

Consider two companies in a world with no taxes 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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