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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Definitions:

Limit Pricing

A strategy where a firm sets the price of its products low enough to discourage new competitors from entering the market.

Price Leadership

A strategy where a leading firm sets prices that other firms in the market follow.

Mutual Interdependence

A situation particularly in oligopolistic markets where the actions of one firm significantly influence the actions and outcomes of other firms within the market.

Price Leadership

A situation where one dominant company in an industry sets the price of goods or services, which other companies then follow.