Question

Petty Corporation is comparing 2 different capital structures: Plan 1 an all-equity plan and Plan 2 a levered plan. Under Plan 1, Petty would have 100,000 shares of stock outstanding and under Plan 2 there would be 100,000 shares of stock outstanding an $2.5 Million in debt outstanding. The interest rate on the debt is 8 %, and there are no taxes.

If EBIT is $400,000, What is the EPS under Plan 1 and then Plan 2?

Select one:

a. Plan 1=1.50; Plan 2=2.00

b. Plan 1= 4.00; Plan 2=2.00

c. Plan 1=1.50; Plan 2=3.33

d. Plan 1= 2.00; Plan 2=1.50

Answer 1

Here there is no taxes , so EBT = Profit after tax

EPS

plan 1 = 4 , plan 2 = 2

Option B is correct