Firms A and B have simple capital structure with the same number of common stock outstanding. A finances its operations relying on debt financing while B prefers issuing preferred equity. If both the firms had the same net income last year, Firm A will have a:
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A. B. C. D.A
For a simple capital structure, EPS = (Net Income - Preferred stock dividends)/weighted # of common shares Since both the firms have the same net income and common shares outstanding, Firm B will show a lower EPS due to the payment of preferred stock dividends.