How to Do an EPS/EBIT Analysis

Scenario 1 

Input Data	The Number
Amount of capital needed	$75 million
EBIT	15 million
Interest Rate	6 per cent
Tax Rate	35 per cent
Stock Price	$75
#Shares outstanding	250 million

	100% Debt	100% Stock	50/50 Debt/Stk Combo
$EBIT	$ 15,000,000	$ 15,000,000	$ 15,000,000
$INTEREST	$ 900,000	-	$ 450,000
$EBT	$ 14,100,000	$ 15,000,000	$ 14,550,000
$TAXES	$ 4,935,000	$ 5,250,000	$ 5,092,500
$EAT	$ 9,165,000	$ 9,750,000	$9,457,500
#SHARES	250,000,000	$ 251,000,000	$ 250,500,000
$EPS	0.0366	0.0388	0.0378

Explanations 

Based on the calculations above, the 100 % stock option is the best capital source for XYZ Company. The option has the highest Earnings per Share. A high EPS is favorable for the company because it indicates that the XYZ will generate more income, hence increasing dividend payout over time ( Ushman, 2020) . Investors prefer profitable investments. Therefore, XYZ Company should consider the 100% stock option to increase its profits to meet shareholders’ expectations.

Scenario 2 

Input Data	The Number
Amount of capital needed	$75 million
EBIT	15 million
Interest Rate	8 percent
Tax Rate	35 percent
Stock Price	$75
#Shares outstanding	250 million

	100% Debt	100% Stock	50/50 Debt/Stk Combo
$EBIT	$ 15,000,000	$ 15,000,000	$ 15,000,000
$INTEREST	$ 1,200,000	0	$ 600,000
$EBT	$ 13,500,000	$ 15,000,000	$ 14,400,000
$TAXES	$ 4,830,000	$ 5,250,000	$ 5,040,000
$EAT	$ 8,670,000	$ 9,750,000	$ 9,360,000
#SHARES	0	$ 251,000,000	$ 250,500,000
$EPS	0	0.03884	0.0374

In scenario 2, the 100 % stock option is the best source of capital for XYZ Company. 100% stock option has the highest Earnings per Share. A high EPS is favorable to the firm because it shows that the company can generate high income, thus may increase dividend payout in the future ( Ushman, 2020) . Investors usually prefer profitable investments that can pay more dividends. Therefore, the 100 % stock option is the best for XYZ Company.

Scenario 3 

Input Data	The Number
Amount of capital needed	$75 million
EBIT	15 million
Interest Rate	6 percent
Tax Rate	20 percent
Stock Price	$75
#Shares outstanding	250 million

	100% Debt	100% Stock	50/50 Debt/Stk Combo
$EBIT	$ 15,000,000	$ 15,000,000	$ 15,000,000
$INTEREST	$ 900,000	0	$ 450,000
$EBT	$ 14,100,000	$ 15,000,000	$ 14,550,000
$TAXES	$ 2,820,000	$ 3,000,000	$ 2,910,000
$EAT	$ 11,280,000	$ 12,000,000	$ 11,640,000
#SHARES	0	$ 250,000,000	$ 175,000,000
$EPS	0	0.048	0.0665

In scenario 3, 50/50 Debt/Stk Combo is the best financing option for XYZ Company. Among the three options, 50/50 Debt/Stk Combo has the highest Earnings per Share, which means that its shares will generate more returns if the company considers this option. Subsequently, the profits of XYZ Company will increase; hence the company will be able to pay a high dividend in the future ( Ushman, 2020) . 50/50 Debt/Stk Combo capitalization method means that XYZ Company will fund 50 % of the capital needed by debt capital sources and 50 % of the capital by stock combo. The 50/50 Debt/Stk Combo option is suitable for the company because it reduces the company's liquidity in the long-run. After all, part of the capital is financed by shareholders' equity who are owners of the firm.

Scenario 4 

Input Data	The Number
Amount of capital needed	$75 million
EBIT	15 million
Interest Rate	6 percent
Tax Rate	35 percent
Stock Price	$50
#Shares outstanding	250 million

	100% Debt	100% Stock	50/50 Debt/Stk Combo
$EBIT	$ 15,000,000	$ 15,000,000	$ 15,000,000
$INTEREST	$ 900,000	-	$ 450,000
$EBT	$ 14,100,000	$ 15,000,000	$ 14,550,000
$TAXES	$ 4,935,000	$ 5,250,000	$ 5,092,500
$EAT	$ 9,165,000	$ 9,750,000	$9,457,500
#SHARES	0	$ 251,500,000	$ 250,750,000
$EPS	-	0.0388	0.0377

In scenario 4, the 100 % stock option is the best capital source for XYZ Company because it has the highest Earnings per Share. A high EPS is favorable to the firm because it shows that the company can generate high income, thus may increase dividend payout in the future. Investors prefer profitable investments that can pay more dividends. Therefore, the 100 % stock financing option is the best of XYZ Company.

Chart and Conclusions 

Scenario 1 

In scenario 1, the interest rate is relatively low, while the corporate rate and stock price are high. As a result, the EPS of the three financing options are relatively low. Therefore, Earnings per Share's values reported in scenario 1 tell that a small interest rate lowers the value of EPS of an option ( Ushman, 2020) . Similarly, the EPS results in this scenario indicate that the high value of corporate tax and stock prices reduces the financing option's EPS.

Scenario 2 

The situation in scenario 2 is nearly the same as scenario 1, but the only difference is that the interest rate scenario 2 is slightly high. As a result, the difference creates a small variance between the values of EPS in scenarios 1 and 2. However, the fact remains that a small interest rate lowers the value of EPS of an option. Correspondingly, the EPS results in scenario 2 show that the high value of corporate tax and stock prices reduces the EPS of a financing option ( Ushman, 2020) .

Scenario 3 

In scenario 3, the interest rate and corporate rate values reduced while the stock price remained the same. As a result, EPS values for 100 % stock options and 50/50 Debt/Stk Combo increased. The rise in EPS of the two options indicates that a decrease in interest and corporate rate increases the EPS of an option ( Ushman, 2020) . Thus, it is prudent for investors to consider options with low interest and corporate rates to increase the Earnings per share of investment.

Scenario 4 

In scenario 4, the investment's interest rate remained the same, while the corporate rate increased to 35 %. The stock price of the investment also reduced from $ 75 million to $ 50 million. Due to these changes, the values of EPS of 100 % stock option and 50/50 Debt/Stk Combo reduced. The difference in EPS's value infers that an increase in the corporate tax rate reduces the Earnings per Share of an investment ( Ushman, 2020) . On the same note, a decrease in stock price reduces the EPS of an investment. Therefore, investors should consider investment options with low interest and corporate rates but with high stock prices to realize high returns.

Importance to Understand And Apply Financing Options For A Decision-Maker. 

Understanding and applying financing options is essential to investors when making investment decisions. It allows investors to select the best financing option, which can generate high profits. Typically, investors venture in business to earn profits; thus, it is vital to assess the best option, maximizing profits. Understanding and appropriately applying financing options can help investors identify the best financing option, generating high profits ( Abdulkareem & Meghanathi, 2020) . For example, an investor can use analysis in the scenarios above to identify the best financing option. The best financing option is one that has the highest Earnings per Share.

Secondly, understanding financing options can also help investors know the best investment periods to avoid heavy losses. When investors invest at the right time, they are likely to earn more profits and returns from their investments ( Abdulkareem & Meghanathi, 2020) . Thus, it prudent for investors to understand and apply financing options appropriately.

References 

Abdulkareem, A. M., & Meghanathi, P. D. (2020). The Impact of Leverage on Earnings per Share: A Study of Selected Petroleum Companies in India.  Journal La Bisecoman ,  1 (2), 25-36. 

Ushman, T. (2020).  Fraud Differential Effect, Earnings per Share, and Stock Price among US Organizations  (Doctoral dissertation, Capella University).