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Fresh out of Harvard Business School, John Thompson, the new CFO of Joe's Southern Cornbread...

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Accounting

Fresh out of Harvard Business School, John Thompson, the new CFO of Joe's Southern Cornbread Company, wants to shake things up at the sleepy little food company headquartered in Birmingham, Alabama. The firm is currently an all minus equity firm because "that's the way we've always done it." Under pressure from a new group of major stockholders, however, Walker is considering acquiring some debt (leverage) in an effort to boost earnings per share. The company currently has 8000 shares of common stock outstanding, but he is thinking about borrowing $16,000 at 8% per year and buying back 2000 of those shares. John Thompson is currently living in a world with no taxes. Refer to the scenario above. If Southern Cornbread's EBIT is $6,000, compare EPS before and after the new debt.

A. All minus equity EPS = $0.787, leveraged minus equity EPS = $0.75

B. All minus equity EPS = $4.50, leveraged minus equity EPS = $3.00

C. All minus equity EPS = $0.75, leveraged minus equity EPS = $0.787

D. All minus equity EPS = $3.00, leveraged minus equity EPS = $4.50

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