Question
Stoner Corporation is considering two financing alternatives. Under the first alternative, interest expense would be $60,000 and there would be 20,000 common shares outstanding. Under
Stoner Corporation is considering two financing alternatives. Under the first alternative, interest expense would be $60,000 and there would be 20,000 common shares outstanding. Under the second alternative, interest costs would be $85,000 and there would be 15,000 common shares outstanding. Stoner has EBIT of $250,000 and pays income taxes at a 21% rate.
If Stoners EBIT went up by 15% to $287,500, which financing alternative would produce the greater EPS?
A. | The first alternative ($60,000 interest; 20,000 shares) | |
B. | It is impossible to tell. | |
C. | They would both produce the same EPS. | |
D. | The second alternative ($85,000 interest; 15,000 shares) |
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