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A firm is considering two different capital structures. The first option is an all-equity firm with...

A firm is considering two different capital structures. The first option is an all-equity firm with 43,000 shares of stock. The levered option is 29,800 shares of stock plus some debt. Ignoring taxes, the break-even EBIT between these two options is $56,800. How much money is the firm considering borrowing if the interest rate is 8.1 percent? Multiple Choice $246,015 $215,263 $225,513 $193,138 $204,500

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Answer #1

EBIT breakeven between these two options is $56800, it means that at this EBIT level EPS of both the options will be same

EPS of all equity firm = EPS of levered firm

EBIT / Number of shares = ( EBIT - Interest ) / Number of shares

$56800 / 43000 = ( $56800 - Interest ) / 29800

$56800 / 43000 * 29800 = $56800 - Interest

$39363.72 = $56800 - Interest

Interest = $56800 - $39363.72 = $17436.28

Amount of borrowing = Interest / rate of interest = $17436.28 / 8.1% = $215263

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