Refer to the scenario above. What would be the unleveraged and leveraged EPSs look like if EBIT were $2,400?
A) All-equity EPS = $4.00, leveraged-equity EPS = $4.50
B) All-equity EPS = $3.00, leveraged-equity EPS = $4.00
C) All-equity EPS = $4.00, leveraged-equity EPS = $5.00
D) All-equity EPS = $3.00, leveraged-equity EPS = $3.50

Question

Quizplus · Accepted Answer

The unleveraged EPS is calculated as EBIT / Number of shares outstanding. In this case, the number of shares outstanding is not given, so we cannot calculate the unleveraged EPS. However, we can calculate the leveraged EPS as EBIT / (Number of shares outstanding * (1 + Debt-to-equity ratio)). In this case, the debt-to-equity ratio is 1, so the leveraged EPS is calculated as EBIT / (Number of shares outstanding * 2). Therefore, the leveraged EPS is $2,400 / (Number of shares outstanding * 2) = $1,200 / Number of shares outstanding. Since the leveraged EPS is $4.50, the number of shares outstanding must be 266.67. Therefore, the unleveraged EPS is $2,400 / 266.67 = $4.00.

Refer to the Scenario Above