Callatin Quarter Company makes saddles. During the preceding calendar year,

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it earned $200,000 after taxes. The company is in a 40 percent tax bracket, it had no debt outstanding at year end, and it has 100,000 shares of common stock outstanding. At the beginning of the current year, it finds that it needs to borrow

$300,000 at an interest rate of 10 percent in order to expand its operations.

a. What are earnings per share before and after financing if EBIT stays the same?

b. What are the absolute and percentage increases in earnings per share if EBIT increases by 50 percent?

Chapter 10 Making Capital Structure Decisions 303