Company A has a capital structure made up of 400,000 $1 ordinary shares and $400,000 10% coupon bonds. Company B has a capital structure made up of 600,000 $1 ordinary shares and $200,000 10% coupon bonds. The corporate tax rate is 40%.

Required:

Calculate the earnings per share (EPS) for each company if the level of earnings before interest and tax (EBIT) for each company is $200,000 (4 marks)

Calculate the earnings per share (EPS) for each company if the level of earnings before interest and tax (EBIT) for each company is increased to $400,000. (4 marks)

Comment on the significance of your findings from questions a) and b) above? (2 mark)