Two companies, Jefferson and Jackson, are virtually identical in all aspects of their operations except that the two companies differ in their capital structures, as shown below:

Both companies have $500 million in total assets and both have a 40% marginal tax rate.What is the EPS for Jefferson at an EBIT level of $50 million?
A)-$1.20
B)$1.20
C)$2.20
D)$3.33

Question

Two companies, Jefferson and Jackson, are virtually identical in all aspects of their operations except that the two companies differ in their capital structures, as shown below:

Both companies have $500 million in total assets and both have a 40% marginal tax rate.What is the EPS for Jefferson at an EBIT level of $50 million?
A)-$1.20 
B)$1.20 
C)$2.20 
D)$3.33

Quizplus · Accepted Answer

EBT = $50 - $20 = $30
EAT = $30(1 - 0.4) = $18
EPS = $18,000,000/15,000,000 = $1.20

Two Companies, Jefferson and Jackson, Are Virtually Identical in All