Two Companies, Jefferson and Jackson, Are Virtually Identical in All

Multiple Choice

Two companies, Jefferson and Jackson, are virtually identical in all aspects of their operations except that the two companies differ in their capital structures, as shown below. Jefferson
$$\begin{array} { l r r } & \text { Jefferson } & \text { Jackson } \\\text { Debt } ( 10 \% ) & \$ 200 \text { million } & \$ 100 \text { million } \\\text { Common equity } & \$ 300 \text { million } & \$ 400 \text { million } \\\text { No. shares outstanding } & 15 \text { million } & 20 \text { million }\end{array}$$
?
Both companies have $500 million in total assets and both have a 40% marginal tax rate. What is the EPS for Jefferson at an EBIT level of $50 million?

A) -$1.20
B) $1.20
C) $2.20
D) $3.33