Wingler Communications Corporation (WCC) produces premium stereo headphones that sell for $29.00 per set, and this year's sales are expected to be 440,000 units. Variable production costs for the expected sales under present production methods are estimated at $10,400,000, and fixed production (operating) costs at present are $1,560,000. WCC has $4,800,000 of debt outstanding at an interest rate of 7%. There are 240,000 shares of common stock outstanding, and there is no preferred stock. The dividend payout ratio is 70%, and WCC is in the 40% federal-plus-state tax bracket.

The company is considering investing $7,200,000 in new equipment. Sales would not increase, but variable costs per unit would decline by 20%. Also, fixed operating costs would increase from $1,560,000 to $1,800,000. WCC could raise the required capital by borrowing $7,200,000 at 10% or by selling 240,000 additional shares of common stock at $30 per share.

1. What would be WCC's EPS (1) under the old production process, (2) under the new process if it uses debt, and (3) under the new process if it uses common stock?

1. $1.16

2. $3.96

3. $2.88

1. At what unit sales level would WCC have the same EPS assuming it undertakes the investment and finances it with debt or with stock? {Hint: V = variable cost per unit = $8,320,000/440,000, and EPS = [(PQ - VQ - F - I)(1 - T)]/N. Set EPSStock= EPSDebtand solve for Q.} .