A firm is expected to generate $1.5 million in operating income and pay $250,000 in interest.Ignoring taxes,this will generate $12.50 earnings per share.What will happen to EPS if operating income increases by 33.3% to $2.0 million?
A) EPS increases by 25% to $15.63.
B) EPS increases by 33.3% to $16.67.
C) EPS increases by 40% to $17.50.
D) EPS increases by 60% to $20.00.

Question

Quizplus · Accepted Answer

The increase in operating income from $1.5 million to $2.0 million is a 33.3% increase. The interest remains $250,000, so the new earnings before interest is $1,750,000. The original EPS was $12.50, which means the number of shares is 100,000 ($1,250,000 / $12.50). The new EPS is $1,750,000 / 100,000 = $17.50, which is a 40% increase from the original EPS of $12.50.

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