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Author Question: Consider two firms that are identical in every way except that one has $1,200 of debt and 350 shares ... (Read 92 times)

Jramos095

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Consider two firms that are identical in every way except that one has $1,200 of debt and 350 shares of stock outstanding, while the other is all-equity and has 400 shares of stock outstanding. Assume that the debt is a perpetuity with annual coupons at the rate of 7%. What is each firm's earnings per share if EBIT is $5,000? Assume a tax rate of 40%.

Leveraged FirmAll-Equity Firm
EBIT$5,000$5,000
EPS??

◦ EPSL = 8.39; EPSE = 7.50
◦ EPSL = 8.39; EPSE = 8.39
◦ EPSL = 7.50; EPSE = 7.50
◦ EPSL = 7.50; EPSE = 8.39
◦ EPSL = 8.43; EPSE = 7.50


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Marked as best answer by Jramos095 on Apr 25, 2021

bbburns21

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Jramos095

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Reply 2 on: Apr 25, 2021
Excellent


jomama

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Reply 3 on: Yesterday
Great answer, keep it coming :)

 

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