Zybeck Corp. projects operating income of $4 million next year. The firm’s income tax rate is 40%.

Zybeck Corp. projects operating income of $4 million next year. The firm’s income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will projected EPS be next year?
A.

$2.33
B.

$1.67
C.

$2.96
D.

$2.10

Solution