Debt vs. Equity Financing: Impact on EPS of a Company Acquisition

A. Debt financing leads to an EPS of $2.51 while EPS under equity financing is $1.91. Debt financing is more favourable as it enhances EPS.

Calculation for EPS under debt financing:

Net Income = EBIT - Interest Expense x (1 - Tax Rate) Net Income = $66 million - $8.125 million x (1 - 0.35) Net Income = $42.4 million

EPS = Net Income / Number of Shares Outstanding EPS = $42.4 million / 15 million shares EPS = $2.51

Calculation for EPS under equity financing:

Number of Shares Outstanding = 22.5 million shares

Net Income = EBIT x (1 - Tax Rate) Net Income = $66 million x (1 - 0.35) Net Income = $42.9 million

EPS = Net Income / Number of Shares Outstanding EPS = $42.9 million / 22.5 million shares EPS = $1.91

Therefore, the correct answer is A. Debt financing leads to an EPS of $2.51 while EPS under equity financing is $1.91. Debt financing is more favourable as it enhances EPS.