Asked by Scott Johnston on May 09, 2024
Verified
A firm has 30,000 shares of stock outstanding, $450,000 in debt at a 9% rate, an EBIT of $112,000, and a tax rate of 0%. What is the EPS?
A) $2.38
B) $2.51
C) $2.87
D) $3.36
E) $3.73
Stock Outstanding
The total shares of a corporation's stock currently owned by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s insiders.
Rate
A measure often used in finance to denote a percentage charged or paid over time, such as an interest rate or growth rate.
EBIT
Earnings Before Interest and Taxes, a measure of a company's profitability that excludes interest and income tax expenses.
- Examine how a firm's value is influenced by various capital structures and the effect of leverage.
Verified Answer
MD
Matthew DurhamMay 10, 2024
Final Answer :
A
Explanation :
First, calculate the interest expense, which is 9% of $450,000 = $40,500. Subtract this from the EBIT to get earnings before taxes (EBT), which is $112,000 - $40,500 = $71,500. Since the tax rate is 0%, the net income is also $71,500. Divide this by the number of shares (30,000) to get the EPS: $71,500 / 30,000 = $2.38.
Learning Objectives
- Examine how a firm's value is influenced by various capital structures and the effect of leverage.