THEA 11000 Lecture 3: Asian Theater
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31 Jan 2019
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You plan to invest in one of two home delivery pizza companies, High and Low, that were recently founded and are about to commence operations. They are identical except for their use of debt (wd) and the interest rates on their debt--High uses more debt and thus must pay a higher interest rate. Based on the data given below, how much higher or lower will High's expected EPS be versus that of Low, i.e., what is EPSHigh â EPSLow? Do not round your intermediate calculations.
| Applicable to Both Firms | Firm High's Data | Firm Low's Data | |||||
| Capital | $3,000,000 | wd | 70% | wd | 20% | ||
| EBIT | $565,000 | Shares | 90,000 | Shares | 240,000 | ||
| Tax rate | 35% | Int. rate | 12% | Int. rate | 10% | ||
â
| a. | $01.16 | |
| b. | $00.80 | |
| c. | $00.89 | |
| d. | $01.07 | |
| e. | $00.67 |
