Question

Franklin 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 205,000 shares of stock outstanding. Under Plan II, there would be 155,000 shares of stock outstanding and $2.3 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes.

  

a.	If EBIT is $250,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	EPS
Plan I	$
Plan II	$

    

b.	If EBIT is $500,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	EPS
Plan I	$
Plan II	$

   

c.	What is the break-even EBIT? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

Break-even EBIT

$

Answer 1

Answer to Part c.
At Break Even EBIT, EPS under both the Plan will be equal.
Therefore,
EBIT / 205,000 = (EBIT – 138,000) / 155,000
155,000 * EBIT = 205,000 * EBIT – 28,290,000,000
50,000 EBIT = 28,290,000,000
EBIT = $565,800