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CGMA practice questions

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Question 1Finance

A project requires an initial outlay of $100,000 and is expected to generate $30,000 per year for five years. The company's required rate of return is 10%, and the five-year annuity factor at 10% is 3.791. What should the company do, and why?

  1. Reject, because the payback period exceeds five years
  2. Reject, because the NPV is approximately -$13,730
  3. Accept, because the NPV is approximately $50,000
  4. Accept, because the NPV is approximately $13,730 Correct answer.

Explanation

NPV equals the present value of the inflows minus the initial outlay: $30,000 x 3.791 = $113,730, less $100,000 = $13,730. A positive NPV means the project returns more than the 10% cost of capital, so it adds value and should be accepted.

Question 2Finance

A company reports current assets of $600,000 (including $200,000 of inventory) and current liabilities of $300,000. What is the quick (acid-test) ratio?

  1. 2.00
  2. 1.33 Correct answer.
  3. 0.67
  4. 3.00

Explanation

The quick ratio removes inventory, which may be slow to convert to cash, from current assets: ($600,000 - $200,000) / $300,000 = 1.33. It measures the ability to meet short-term obligations with the most liquid assets.

Question 3Finance

A company has bonds outstanding with a pre-tax yield of 9%, and its marginal tax rate is 30%. What is the after-tax cost of debt used in the WACC calculation?

  1. 12.9%
  2. 2.7%
  3. 9.0%
  4. 6.3% Correct answer.

Explanation

Interest is tax deductible, so the effective cost of debt is the pre-tax rate multiplied by (1 - tax rate): 9% x 0.70 = 6.3%. This tax shield is why debt is cheaper than equity in the WACC.

Question 4Finance

A machine costs $150,000 and generates annual net cash inflows of $60,000. Using the payback method, how long does it take to recover the investment?

  1. 3.0 years
  2. 1.5 years
  3. 2.5 years Correct answer.
  4. 2.0 years

Explanation

Payback is the initial outlay divided by the constant annual cash inflow: $150,000 / $60,000 = 2.5 years. The method ignores the time value of money and any cash flows after the payback point.

Question 5Finance

A product sells for $60 per unit, has variable costs of $36 per unit, and the company incurs $240,000 of fixed costs per year. What is the break-even volume in units?

  1. 15,000 units
  2. 6,667 units
  3. 10,000 units Correct answer.
  4. 4,000 units

Explanation

Break-even units equal fixed costs divided by the contribution margin per unit: $240,000 / ($60 - $36) = 10,000 units. At that volume total contribution exactly covers fixed costs and operating income is zero.

Question 6Finance

A company has days inventory outstanding of 45, days sales outstanding of 60, and days payables outstanding of 35. What is its cash conversion cycle?

  1. 35 days
  2. 110 days
  3. 70 days Correct answer.
  4. 140 days

Explanation

The cash conversion cycle is inventory days plus receivable days minus payable days: 45 + 60 - 35 = 70 days. It represents the length of time cash is tied up in operating working capital.

Question 7Finance

A preferred share pays a fixed annual dividend of $6 and investors require an 8% return. Using the dividend perpetuity model, what is the value of the share?

  1. $60.00
  2. $80.00
  3. $48.00
  4. $75.00 Correct answer.

Explanation

A level perpetuity is valued as the payment divided by the discount rate: $6 / 0.08 = $75.00. Preferred dividends are assumed to continue indefinitely with no growth.

Question 8Finance

A company has a net profit margin of 4%, an asset turnover of 2.5 times, and an equity multiplier of 1.8. Using the DuPont framework, what is its return on equity?

  1. 18.0% Correct answer.
  2. 10.0%
  3. 9.0%
  4. 11.1%

Explanation

ROE under the three-factor DuPont model equals margin x turnover x leverage: 4% x 2.5 x 1.8 = 18%. The framework shows how profitability, efficiency, and financing each contribute to shareholder returns.

Question 9Finance

A company finances itself with 60% equity costing 14% and 40% debt with a pre-tax cost of 8%. The tax rate is 25%. What is the weighted average cost of capital?

  1. 11.6%
  2. 14.0%
  3. 12.2%
  4. 10.8% Correct answer.

Explanation

The after-tax cost of debt is 8% x 0.75 = 6%, so WACC is (0.60 x 14%) + (0.40 x 6%) = 8.4% + 2.4% = 10.8%. Debt is weighted at its after-tax cost because interest is deductible.

Question 10Finance

The risk-free rate is 3.5%, the expected return on the market portfolio is 9.5%, and a company's beta is 1.4. Using the capital asset pricing model, what is the cost of equity?

  1. 9.9%
  2. 8.4%
  3. 13.3%
  4. 11.9% Correct answer.

Explanation

CAPM gives the cost of equity as the risk-free rate plus beta times the market risk premium: 3.5% + 1.4 x (9.5% - 3.5%) = 3.5% + 8.4% = 11.9%. Only systematic risk is rewarded because it cannot be diversified away.

Question 11Finance

A company is choosing between two mutually exclusive projects, both of which are acceptable. Project A has an IRR of 18% and an NPV of $40,000; Project B has an IRR of 22% and an NPV of $25,000. Which project should be selected?

  1. Project B, because its IRR is higher
  2. Project A, because its payback must be shorter
  3. Project A, because it has the larger NPV Correct answer.
  4. Project B, because the two methods always agree

Explanation

For mutually exclusive projects, NPV is the preferred criterion because it measures the absolute increase in firm value and assumes reinvestment at the cost of capital. IRR can mislead when projects differ in scale or timing, since it assumes reinvestment at the IRR itself.

Question 12Finance

A company has contribution margin of $600,000 and operating income of $150,000. What is its degree of operating leverage?

  1. 2.00
  2. 1.25
  3. 4.00 Correct answer.
  4. 3.00

Explanation

Degree of operating leverage equals contribution margin divided by operating income: $600,000 / $150,000 = 4.00. It means a 1% change in sales produces a 4% change in operating income because fixed costs magnify the effect.

Question 13Finance

A retailer uses 10,000 units of a component each year. The cost of placing an order is $36 and the annual holding cost is $2 per unit. Using the economic order quantity model, what is the optimal order size?

  1. 189 units
  2. 424 units
  3. 1,200 units
  4. 600 units Correct answer.

Explanation

EOQ equals the square root of (2 x annual demand x order cost / holding cost): the square root of (2 x 10,000 x $36 / $2) = the square root of 360,000 = 600 units. At this quantity total ordering and holding costs are minimised.

Question 14Finance

A five-year bond has a face value of $1,000 and pays an annual coupon of 6%. If the market yield to maturity is 8%, what is the bond's approximate price? (Five-year annuity factor at 8% = 3.993; five-year discount factor at 8% = 0.681.)

  1. $920 Correct answer.
  2. $1,080
  3. $880
  4. $1,000

Explanation

Price equals the present value of the coupons plus the present value of principal: ($60 x 3.993) + ($1,000 x 0.681) = $239.58 + $681 = approximately $920. When the yield exceeds the coupon rate, the bond trades at a discount to face value.

Question 15Finance

A company expects next year's sales to be $5,000,000 and maintains a net profit margin of 5% with a dividend payout ratio of 40%. Under the percentage-of-sales method, what is the projected addition to retained earnings?

  1. $100,000
  2. $200,000
  3. $250,000
  4. $150,000 Correct answer.

Explanation

Projected net income is $5,000,000 x 5% = $250,000. With a 40% payout ratio, 60% is retained: $250,000 x 0.60 = $150,000, which is added to retained earnings and funds part of the forecast asset growth.

Question 16Finance

A company's suppliers and customers begin taking longer to deposit and present the company's cheques. What is the effect on the company?

  1. Collection float rises, which harms the company
  2. The company's bank balance falls below its book balance
  3. Disbursement float falls, which harms the company
  4. Disbursement float rises, which benefits the firm Correct answer.

Explanation

Disbursement float is the interval between issuing a payment and its clearing the bank. A longer interval lets the company keep and use the funds for longer, so a rise in disbursement float is favourable. The book balance falls before the bank balance does.

Question 17Finance

A US exporter will receive EUR 2 million in 90 days and is concerned that the euro will weaken against the dollar. Which action best hedges this transaction exposure?

  1. Enter a forward contract to sell euros for dollars Correct answer.
  2. Enter a forward contract to buy euros with dollars
  3. Purchase a call option on euros
  4. Take no action, because transaction exposure is only an accounting issue

Explanation

A future euro receipt creates a long position in euros, so the offsetting hedge is to sell euros forward for dollars at a rate fixed today. This locks in the dollar proceeds and removes the risk of euro depreciation.

Question 18Finance

Under the Modigliani-Miller model with corporate taxes, the value of a levered firm equals which of the following?

  1. The unlevered value plus the present value of financial distress costs
  2. The unlevered value plus the present value of the interest tax shield Correct answer.
  3. The value of an unlevered firm with the same assets
  4. The unlevered value minus the present value of the interest tax shield

Explanation

With corporate taxes and no other frictions, the tax deductibility of interest adds value equal to the tax rate times the debt, which is the present value of the interest tax shield. Hence levered value equals unlevered value plus that shield.

Question 19Finance

According to Modigliani and Miller, dividend policy does not affect firm value when which set of conditions holds?

  1. The firm holds surplus cash that it cannot reinvest
  2. Dividends are taxed at a lower rate than capital gains
  3. There are no taxes or transaction costs and investment policy is fixed Correct answer.
  4. Managers hold private information about future prospects

Explanation

MM dividend irrelevance requires perfect capital markets: no taxes, no transaction or flotation costs, and a fixed investment policy so that paying a dividend does not alter the assets of the firm. Shareholders can then create their own dividend by selling shares.

Question 20Finance

A company decides to relax its credit standards by selling to customers with lower credit scores. What is the most likely effect?

  1. Sales are unchanged while bad debt expense falls
  2. Sales rise while bad debt expense also falls
  3. Sales rise while receivables and bad debt expense also rise Correct answer.
  4. Sales fall and the investment in receivables falls

Explanation

Looser credit standards attract more customers and raise sales, but they also lengthen the average collection period and increase the proportion of accounts that default. The decision is worthwhile only if the incremental contribution exceeds the added carrying and bad debt costs.

Question 21Finance

A company holds an option to delay construction of a new plant for two years. Why does that option have value?

  1. It allows the company to abandon the project if demand is weak while capturing upside if demand is strong Correct answer.
  2. It always increases the project's internal rate of return
  3. It reduces the nominal construction cost of the plant
  4. It lowers the discount rate applied to the project's cash flows

Explanation

A real option to defer gives management the right, but not the obligation, to invest, so it caps the downside at the value of the option while retaining the upside from favourable demand. Conventional DCF, which assumes a now-or-never decision, typically understates the project's value.

Question 22Finance

Which of the following bonds has the greatest price sensitivity to a given change in market yields?

  1. A 10-year bond with a 9% coupon
  2. A 2-year zero-coupon bond
  3. A 5-year bond with a 10% coupon
  4. A 10-year bond with a 4% coupon Correct answer.

Explanation

Interest rate sensitivity rises with maturity and falls with the size of the coupon, because more of the value comes early as coupon payments. Among these, the longest maturity combined with the lowest coupon produces the highest duration and therefore the greatest price change for a given yield movement.

Question 23Finance

A firm has a capital budget of $1,000,000 and four indivisible projects: W (cost $600,000, NPV $120,000); X (cost $400,000, NPV $60,000); Y (cost $400,000, NPV $24,000); Z (cost $300,000, NPV $21,000). Which selection maximises value within the budget?

  1. W and X, total NPV $180,000 Correct answer.
  2. X and Z, total NPV $81,000
  3. W and Y, total NPV $144,000
  4. W alone, total NPV $120,000

Explanation

With capital rationing and indivisible projects, rank by profitability index and then test feasible combinations. W (PI 1.20) and X (PI 1.15) together use exactly the $1,000,000 budget and generate the highest total NPV of $180,000.

Question 24Finance

A project has a base-case NPV of $2 million. If the discount rate is 1 percentage point higher, NPV falls to $1.5 million; if the selling price is 5% lower, NPV falls to $200,000. What is the best interpretation?

  1. The project must be rejected because one scenario produces a negative NPV
  2. The discount rate is the dominant driver of the project's value
  3. NPV is far more sensitive to the selling price than to the discount rate Correct answer.
  4. Scenario analysis proves that the project will earn $2 million

Explanation

Sensitivity analysis measures how much the decision variable moves for a given change in an input. A 5% price fall wipes out $1.8 million of NPV while a full percentage point on the discount rate removes only $0.5 million, so price is the critical driver and should be managed and monitored most closely.

Question 25Finance

A company will borrow $10 million in three months' time for a six-month period and wants to lock in the interest rate today. Which instrument matches the exposure?

  1. A 3x6 forward rate agreement
  2. An interest rate cap purchased in six months
  3. A 3x9 forward rate agreement Correct answer.
  4. A 6x9 forward rate agreement

Explanation

A forward rate agreement is labelled by the months to its start and to its maturity. A 3x9 FRA starts in three months and ends in nine months, covering exactly the six-month borrowing period that begins in three months.

Question 26Finance

Which ratio measures a company's ability to settle current liabilities using only its most liquid current assets?

  1. Quick ratio Correct answer.
  2. Current ratio
  3. Debt-to-equity ratio
  4. Inventory turnover

Explanation

The quick (acid-test) ratio removes inventory from current assets and compares the remainder with current liabilities, so it tests liquidity without relying on selling stock. The current ratio includes inventory and is therefore a less stringent measure.

Question 27Finance

Which capital budgeting method measures the time taken to recover the initial cash outlay and ignores the time value of money?

  1. Internal rate of return
  2. Payback period Correct answer.
  3. Discounted payback period
  4. Net present value

Explanation

The payback period counts the years needed for cumulative cash inflows to equal the initial investment and applies no discounting. Discounted payback corrects this by discounting the flows, while NPV and IRR both rest on discounted cash flows.

Question 28Finance

A company is deciding whether to replace an old machine. The machine has a book value of $40,000 and no resale value. In the replacement decision, the book value is best described as:

  1. A sunk cost Correct answer.
  2. A relevant cost
  3. An incremental cost
  4. An opportunity cost

Explanation

A sunk cost is a past outlay that the decision cannot alter, so it is irrelevant to the choice between keeping and replacing the machine. Only future cash flows that differ between the alternatives should be included.

Question 29Finance

Which costing approach allocates overhead to products on the basis of the activities that consume the resources?

  1. Job order costing
  2. Activity-based costing Correct answer.
  3. Traditional absorption costing
  4. Process costing

Explanation

Activity-based costing identifies a cost driver for each activity and charges overhead according to the activity consumed, which reduces arbitrary allocation when products differ in complexity. Traditional absorption costing instead spreads overhead using a single volume-based rate.

Question 30Finance

A product sells for $40 per unit and has a variable cost of $24 per unit. Annual fixed costs are $320,000. What is the break-even volume in units?

  1. 8,000 units
  2. 20,000 units Correct answer.
  3. 24,000 units
  4. 13,333 units

Explanation

Break-even volume equals fixed costs divided by contribution per unit. Contribution per unit is $40 − $24 = $16, so $320,000 ÷ $16 = 20,000 units.

Question 31Finance

Which of the following is a source of short-term finance?

  1. An issue of ordinary shares
  2. A bank overdraft Correct answer.
  3. A twenty-year mortgage
  4. A ten-year bond issue

Explanation

A bank overdraft is repayable on demand and is used to fund day-to-day working capital, which makes it a short-term facility. Bonds, ordinary shares and mortgages all provide funds for periods well beyond one year.

Question 32Finance

Under the Gordon growth model, the cost of equity is calculated as:

  1. D1/P0 − g
  2. D1/P0 + g Correct answer.
  3. P0/D1 + g
  4. (D1 + g)/P0

Explanation

The model prices a share as D1 divided by the difference between the cost of equity and growth. Rearranging for the cost of equity gives the dividend yield D1/P0 plus the expected growth rate g, because investors expect the dividend stream to grow.

Question 33Finance

In the preparation of a master budget, which budget is normally prepared first?

  1. Capital expenditure budget
  2. Cash budget
  3. Production budget
  4. Sales budget Correct answer.

Explanation

The sales budget is the starting point because production, purchasing, labour and cash budgets are all driven by forecast sales volumes. Without a sales forecast the operating budgets have no basis for their quantities.

Question 34Finance

A product has a standard cost of 3 kg of material at $8 per kg. Actual output was 2,000 units, using 6,300 kg of material that cost $48,510 in total. What is the material price variance?

  1. $2,400 favourable
  2. $1,890 favourable Correct answer.
  3. $2,400 adverse
  4. $1,890 adverse

Explanation

The price variance compares the actual price paid with the standard price, multiplied by the quantity actually used. The actual price is $48,510 ÷ 6,300 kg = $7.70, so ($7.70 − $8.00) × 6,300 = $1,890 favourable because material cost less than standard.

Question 35Finance

A company's bonds have a yield to maturity of 6.5%. The company's marginal tax rate is 25% and it has no preference shares. Its after-tax cost of debt is closest to:

  1. 4.88% Correct answer.
  2. 6.50%
  3. 8.67%
  4. 1.63%

Explanation

Interest is tax deductible, so the after-tax cost of debt is the pre-tax yield multiplied by one minus the tax rate. 6.5% × (1 − 0.25) = 4.875%, approximately 4.88%.

Question 36Finance

A division reports profit of $400,000 and invested capital of $2,000,000. The company's required rate of return is 12%. What is the division's residual income?

  1. $120,000
  2. $240,000
  3. $400,000
  4. $160,000 Correct answer.

Explanation

Residual income is divisional profit less a capital charge equal to invested capital multiplied by the required return. The charge is $2,000,000 × 12% = $240,000, so residual income is $400,000 − $240,000 = $160,000.

Question 37Finance

A company reports net income of $300,000, depreciation of $80,000, an increase in receivables of $50,000 and a decrease in payables of $20,000. Using the indirect method, what is operating cash flow?

  1. $450,000
  2. $310,000 Correct answer.
  3. $250,000
  4. $380,000

Explanation

Under the indirect method, non-cash depreciation is added back and the cash absorbed by working capital movements is deducted. $300,000 + $80,000 − $50,000 − $20,000 = $310,000.

Question 38Finance

A supplier offers terms of 2/10 net 40. Using a 365-day year, what is the approximate annualised cost of forgoing the discount?

  1. 20.4%
  2. 37.2%
  3. 24.8% Correct answer.
  4. 18.3%

Explanation

Forgoing the discount means paying 2% in order to keep the funds for the 30 extra days between day 10 and day 40. The annualised cost is (0.02 ÷ 0.98) × (365 ÷ 30) ≈ 24.8%.

Question 39Finance

A company has 4 million shares in issue with a market price of $5.00. It makes a 1-for-4 rights issue at $3.00. What is the theoretical ex-rights price per share?

  1. $3.80
  2. $4.75
  3. $4.00
  4. $4.60 Correct answer.

Explanation

The theoretical ex-rights price is the combined market value of the old and new shares divided by the total share count after the issue. (4m × $5.00 + 1m × $3.00) ÷ 5m = $23m ÷ 5m = $4.60.

Question 40Finance

A company needs 5,000 units of a component. Making it costs $12 per unit in variable costs plus $25,000 of avoidable fixed overhead, while $35,000 of other fixed overhead is unavoidable. Buying costs $17 per unit. If the company makes the component it must forgo $10,000 of rental income from the space used. What is the total relevant cost of making the 5,000 units?

  1. $85,000
  2. $105,000
  3. $60,000
  4. $95,000 Correct answer.

Explanation

Relevant costs are future costs that differ between the alternatives, and the forgone rent is an opportunity cost of making. $60,000 variable + $25,000 avoidable fixed + $10,000 forgone rent = $95,000, compared with $85,000 to buy.

Question 41Finance

A bond with a face value of $1,000 pays an annual coupon of 5% and is currently priced at $952. What is its current yield?

  1. 5.50%
  2. 5.00%
  3. 4.76%
  4. 5.25% Correct answer.

Explanation

Current yield is the annual coupon divided by the current market price and ignores any gain or loss to maturity. $50 ÷ $952 = 5.25%.

Question 42Finance

A firm finances investment first from retained earnings, then from debt, and only lastly from new equity. This pattern is described by:

  1. The pecking order theory Correct answer.
  2. The residual dividend theory
  3. The trade-off theory
  4. The Modigliani-Miller irrelevance theorem

Explanation

The pecking order theory explains financing choices through information asymmetry: managers avoid issuing equity when they believe shares are underpriced, so internal funds come first, then debt, then equity. The trade-off theory instead seeks an optimal leverage ratio.

Question 43Finance

Division A produces a component with a variable cost of $30 per unit and sells it externally for $50 per unit. Division A is operating at full capacity. Division B wants to buy 1,000 units internally. What is the minimum transfer price per unit?

  1. $30
  2. $40
  3. $50 Correct answer.
  4. $35

Explanation

When the selling division has no spare capacity, an internal transfer displaces an external sale, so the minimum transfer price is the market price of $50. A lower price would leave the company as a whole worse off.

Question 44Finance

The spot exchange rate is $1.25 per euro and the one-year forward rate is $1.22 per euro. If the one-year US interest rate is 5%, the one-year euro interest rate implied by interest rate parity is closest to:

  1. 7.6% Correct answer.
  2. 3.5%
  3. 5.0%
  4. 2.4%

Explanation

Interest rate parity sets the forward rate equal to the spot rate multiplied by the ratio of the interest rate factors. Rearranging gives 1 + i€ = 1.05 ÷ (1.22 ÷ 1.25) = 1.0758, so the implied euro rate is about 7.6%.

Question 45Finance

A company produces 10,000 units a year with variable costs of $20 per unit and fixed costs of $90,000, and sells them at $32. It has spare capacity and receives a one-off order for 2,000 units at $24 each, which would add $6,000 of fixed costs. What is the incremental profit from accepting the order?

  1. $2,000 Correct answer.
  2. $8,000
  3. $24,000
  4. $0

Explanation

With spare capacity, existing fixed costs are unaffected, so only incremental contribution and incremental fixed costs matter. Contribution is 2,000 × ($24 − $20) = $8,000, less $6,000 of extra fixed cost, giving $2,000.

Question 46Finance

Under the static trade-off theory, which pattern best explains why firm value first rises and later falls as leverage increases?

  1. The cost of equity falls as leverage rises, and the cost of debt is unchanged
  2. Agency costs of equity fall while the tax benefit of debt grows without limit
  3. Tax shields rise, then distress costs rise faster Correct answer.
  4. Pecking order preferences reverse once leverage exceeds the industry average

Explanation

Moderate debt adds value because interest is tax deductible, but rising leverage also raises the probability and expected cost of financial distress. Value peaks where the marginal tax benefit of extra debt equals the marginal expected distress cost.

Question 47Finance

A firm expects free cash flow to the firm of $50 million next year, growing at 3% a year in perpetuity. Its WACC is 9%, it has $200 million of debt and 40 million shares in issue. What is the value per share?

  1. $20.83
  2. $8.89
  3. $15.83 Correct answer.
  4. $18.75

Explanation

Enterprise value is FCFF1 divided by the difference between WACC and growth: $50m ÷ 0.06 = $833.3m. Subtracting $200m of debt leaves equity of $633.3m, which is $15.83 per share on 40 million shares.

Question 48Finance

Two mutually exclusive projects have conventional cash flows and identical NPVs at a discount rate of 12%. Project A's NPV falls more steeply than Project B's as the discount rate rises. Which statement is correct?

  1. Project A is preferred at every discount rate above 12%
  2. Both projects have the same internal rate of return
  3. Project A has the higher internal rate of return
  4. Project B has the higher internal rate of return Correct answer.

Explanation

Where the NPV profiles cross, the project whose NPV falls more steeply has the lower IRR, because its profile reaches zero at a lower discount rate. Project A is therefore preferred below 12% but has the lower IRR, so Project B has the higher IRR.

Question 49Finance

A US company must pay €1,000,000 in 90 days. The spot rate is $1.10 per euro. The US dollar interest rate is 4% a year and the euro interest rate is 2% a year (use a 360-day year). Using a money market hedge, how many dollars must the company borrow now?

  1. $1,120,000
  2. $1,105,500
  3. $1,100,000
  4. $1,094,500 Correct answer.

Explanation

The hedge borrows dollars now, converts them to euros at spot and invests the euros so that they grow to the payable amount. Euros needed now are €1,000,000 ÷ (1 + 0.02 × 90/360) = €995,025, which costs $1,094,527 at $1.10 per euro.

Question 50Finance

A company has 1 million shares in issue and $4 million of debt costing 8%. It can invest $2 million in a project expected to return 12% before tax, financed entirely with new debt. The tax rate is 25%. What is the effect on earnings per share?

  1. Earnings per share rises by $0.06 Correct answer.
  2. Earnings per share falls by $0.02
  3. Earnings per share rises by $0.09
  4. Earnings per share is unchanged

Explanation

Only the incremental after-tax operating profit and the incremental interest matter, and debt finance leaves the share count unchanged. Extra operating profit is 12% × $2m = $240,000, extra interest is 8% × $2m = $160,000, so after tax the gain is $80,000 × 0.75 = $60,000, or $0.06 per share.