Question

Rise Against Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 210,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $2.28 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

A. If EBIT is $500,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

EPS Plan I = $
EPS Plan II=$

B. If EBIT is $750,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

EPS Plan I = $
EPS Plan II=$

C. What is the break-even EBIT? (Enter your answer in dollars, not millions of dollars, i.e., 1,234,567.)

Break-even EBIT=$

Answer 1

A.

*Calculation of EPS under plan I:

EPS= NET PROFIT / TOTAL OUTSTANDING SHARE

=500,000 / 210,000

=$ 2.38

* Calculation of EPS under plan II

NET PROFIT/ LOSS= EBIT - INTEREST

=500,000-(22800000* 8%)

=500000-1824000

= -$1324000

EPS= -1324000 / 150,000

=$ -8.82

EPS Plan I=$2.38

EPS Plan II=$-8.82

B.

*Calculation of EPS under Plan I

EPS= NET PROFIT / TOTAL OUTSTANDING SHARE

= 750,000 / 210,000

=$ 3.57

*Calculation of EPS under plan II

NET PROFIT= EBIT - INTERST

=750,000 - (22800000 * 8%)

= 750,000 - 1824000

=$ - 1074000

EPS= -1074000 / 150,000

= -7.16

EPS Plan I=$3.57

EPS Plan II=$ -7.16

C. Calculation of break even EBIT:

Break even EBIT when EBIT 500,000 =

=EBIT/ 210,000= EBIT-1824000/ 150,000

=EBIT =210,000/150,000 (EBIT-1824000)

= EBIT = 1.4 EBIT -2253600

=.4 EBIT= -2253600

= EBIT= -2253600/ .4

= EBIT = $-6,384,000

Break even EBIT = $ -6,384,000