Fresh out of Harvard Business School, Joe Walker, new CFO of Dixie's Southern Cornbread Company, wants to shake things up at the sleepy little food company. The firm is currently an all-equity firm because "that's the way we've always done it." Under pressure from a new group of major stockholders, however, Walker is considering acquiring some debt (leverage) in an effort to boost earnings per share. The company currently has 600 shares, but Walker is thinking about borrowing $6,000 at 10% per year and buying back 200 of those shares. Referring to this scenario, what would the unleveraged and leveraged EPSs look like if EBIT were only $1,200?

Question 5 options:

a)

All-equity EPS = $2.00, leveraged-equity EPS = $1.50

b)

All-equity EPS = $3.00, leveraged-equity EPS = $2.00

c)

All-equity EPS = $2.00, leveraged-equity EPS = $3.00

d)

All-equity EPS = $4.50, leveraged-equity EPS = $3.00