Question

Yasmin Corporation is comparing two different capital structures, an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the Yasmin would have 145,500 shares of stock outstanding. Under Plan II, there would be 58,200 shares of stock outstanding and $1.455 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

Required:

(a)	If EBIT is $ 170,000, Plan I's EPS is $__X__ while Plan II's EPS is $__Y__ . (Round your answers to 2 decimal places. (e.g., 32.16))

  

(b)	If EBIT is $ 679,000, Plan I's EPS is $__X__ and Plan II's EPS is $__Y__ . (Round your answers to 2 decimal places. (e.g., 32.16))

(c)	The break-even EBIT is $__X__ . (Round your answer to the nearest whole dollar amount. (e.g., 32))

Answer 1

a.

	Plan I	Plan II
EBIT	170,000	170,000
Less: Interest	0	145,500
EBT	170,000	24,500
Number of Shares	145,500	58,200
EPS	$1.168	$0.421

b.

	Plan I	Plan II
EBIT	679,000	679,000
Less: Interest	0	145,500
EBT	679,000	533,500
Number of Shares	145,500	58,200
EPS	$4.667	$9.167

c.Break Even EBIT will be that level where EPS under both the plans will be the same

Let it be x

x/145,500 = (x-145,500)/58,200

X = $242,500

Hence, break even EBIT = $242,500