Question

Ski and Board are two identical firms of identical size operating in identical markets. Ski is unlevered with assets valued at $12000 and has 600 shares of stock outstanding. Board also has $12000 in assets and has $6000 in debt financed at an interest rate of 6.00% and has 300 shares of stock outstanding. Assume perfect capital markets.

Calculate the level of EBIT that would make earnings per share the same for Ski and Board. $________

Answer 1

let EBIT be x,

at x EPS is same for SKi and Board.

EPS =( EBIT - interest - tax ) / number of shares.

here,

tax rate is not given so ignore taxes.

consider Ski.

EPS = x / 600 shares.............(here, interst is nil, since there is no debt)

consider Board:

EPS = (x - $360) / 300 shares.............(interst is $6000*6.00%)

for EPS of SKI and Board to be equal:

x / 600 = (x - $360) / 300

=> x / 2 = x - $360

=>$360 = x - x/2

=>$360 = x/2

=>x = $720.

at EBIT = $720 EPS will be same for Ski and Board.