Hi sir,
Hope you're doing well.
I had the following question, what level of earnings before interest and tax would result in the same EPS for the 2 financial options?
Company had 1000 ordinary shares in issue no debt. It choice to raise Additional £100,000 by issuing 9% long term debt, or issuing 500 shares. Company has 40% tax.
A) £27000
B) £ 21000
C)18000
D) 10800
The answer is A but I don't understand how they get to that figure? Surely there must be a simpler way of arriving to that figure instead of calculating every single option a,b,c and d for share issue and debt option and see if the EPS are the same.
Thank you
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Eps
5y ago#1The only other way is to use a bit of simple algebra.
If the earnings before interest and tax are X, then:
0.6X / 1,500 = (0.6 (X - 9,000)) / 1,000
If you are OK at algebra then solving this is faster that calculating for each option.
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