Reference no: EM132558484

Wired Communications Corporation (WCC) supplies headphones to airlines for use with movie and stereo programs. The headphones sell for $288 per set, and this year's sales are expected to be 45,000 units. Variable production costs for the expected sales under current production methods are estimated at $10,200,000, and fixed (operating) costs are currently $1,560,000. WCC has $4,800,000 of debt outstanding at an interest rate of 8%. There are 240,000 shares of common stock outstanding, and there is no preferred stock. WCC pays out 70% of earnings and is in the 40% marginal tax bracket.

The company is considering investing $7,200,000 in new equipment. Sales would not increase, but variable costs per unit decline by 20%. Also fixed operating costs would increase to $1,800,000. WCC could raise the required capital by borrowing $7,200,000 at 10% or by selling 240,000 additional shares at $30 per share.

a. What would be WCC's EPS (1) under the old production process (2) under the new process if it uses debt, and (3) under the new process if it uses common stock financing?