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 190,000 shares of stock outstanding. Under Plan II, there would be 140,000 shares of stock outstanding and $2.80 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.

  

a.	If EBIT is $275,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

  

	EPS
Plan I	$
Plan II	$

    

b.	If EBIT is $525,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

  

	EPS
Plan I	$
Plan II	$

   

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

  

Break-even EBIT

$

Answer 1

a.Calculation of EPS:

	Plan I	Plan II
EBIT	275,000	275,000
Less: Interest	0	168,000
EBT	275,000	107,000
Number of shares	190,000	140,000
EPS	1.45	0.76

b. Calculation of EPS:

	Plan I	Plan II
EBIT	525,000	525,000
Less: Interest	0	168,000
EBT	525,000	357,000
Number of shares	190,000	140,000
EPS	2.76	2.55

C.Break even EBIT will be that level where EPS under both the plans is same

Let it be x

x/190,000 = (x-168,000)/140,000

x = $638,400

hence, Break even EBIT = $638,400