Khandker Motors finances 40% of its total capital with debt. The cost of debt is 11%. The firm is in the 37% tax bracket and earned an operating profit of $2.5 million dollars. If the Khandker's total capital amounts to $22 million and its book value per share is $20, what are the firm's earnings per share?
A)$0.85
B)$0.88
C)$1.43
D)$1.46

Question

Quizplus · Accepted Answer

The correct answer is D.The firm's earnings per share can be calculated as follows:EBIT = $2.5 millionInterest expense = 0.4 * $22 million * 0.11 = $0.968 millionTaxable income = $2.5 million - $0.968 million = $1.532 millionTaxes = $1.532 million * 0.37 = $0.567 millionNet income = $1.532 million - $0.567 million = $0.965 millionEarnings per share = $0.965 million / (22 million / $20) = $0.88

Khandker Motors Finances 40% of Its Total Capital with Debt