The Butler Company is considering two different capital structures: an all-equit

Question

The Butler Company is considering two different capital structures: an all-equity plan (Plan A) and a levered plan (Plan B). Under Plan A, Butler would have 200,000 shares of stock outstanding. Under Plan B, there would be 100,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 6%, and there are no taxes.

33. If EBIT is $150,000, what is the Earning Per Share for each plan?

Answer: Plan A=$0.75, Plan B=$0.60

How do I set this problem up to find the above answer?

Explanation / Answer

Plan A EBIT = $150,000 Tax = 0 Interest = 0 Shares = 200,000 EPS = $150,000/200,000 = $0.75 Plan B EBIT = $150,000 Tax = 0 Interest = $1.5 million *6% =$90000 Earnings = $150,000 - $90000 = $60000 Shares = 100,000 EPS = $60000/100,000 = $0.60

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