Earnings per share of a company decreases if the additional capital it wanted wa
ID: 2744767 • Letter: E
Question
Earnings per share of a company decreases if the additional capital it wanted was obtained by issuing additional shares of stock. In at least three well composed paragraphs, please explain how this phenomenon comes about. Please also discuss how this decrease in EPS would affect a company’s decision whether to issue equity (shares of stock) or debt (a bond issue) for raising capital. Earnings per share of a company decreases if the additional capital it wanted was obtained by issuing additional shares of stock. In at least three well composed paragraphs, please explain how this phenomenon comes about. Please also discuss how this decrease in EPS would affect a company’s decision whether to issue equity (shares of stock) or debt (a bond issue) for raising capital. Earnings per share of a company decreases if the additional capital it wanted was obtained by issuing additional shares of stock. In at least three well composed paragraphs, please explain how this phenomenon comes about. Please also discuss how this decrease in EPS would affect a company’s decision whether to issue equity (shares of stock) or debt (a bond issue) for raising capital.Explanation / Answer
Earning per share is given by formuale(EPS) = net income/No of shares outstanding. If anu additionaly money is required it can raise by selling new stock to public at the current market price of the stock by which the denominator in the equation increases and overall the ratio will come down.
This will not happen everytime. If the additional money raised and the return on that investment is greather than company cost of equity then the numerator will increase more then overall the ratio will be higher than previously.
The other way of raising money is instead of paying dividends we can use money earnign from net incoem can be used as capital as this free of cost the EPS will not come down .
If money is raised through debt then the interest paid on debt will reduce net income by which EPS will come down. But which one is better depends upon the cost of debt and cost of equity.
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