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 Firm All-Equity Firm
EBIT $5,000 $5,000
EPS ? ?
A) EPSL = 8.39; EPSE = 7.50
B) EPSL = 8.39; EPSE = 8.39
C) EPSL = 7.50; EPSE = 7.50
D) EPSL = 7.50; EPSE = 8.39
E) EPSL = 8.43; EPSE = 7.50
E
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