Question

# Round Hammer is comparing two different capital structures: An all-equity plan (Plan I) and a levered...

Round Hammer 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 170,000 shares of stock outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and \$1.6 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. a. If EBIT is \$525,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b. If EBIT is \$775,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

 Plan I Plan II EBIT 525000 525000 Less: Interest 0 128000 EBT 525000 397000 Less: Taxes 0 0 Net Income 525000 397000 Number of Shares 170000 120000 EPS 3.09 3.31 b. Plan I Plan II EBIT 775000 775000 Less: Interest 0 128000 EBT 775000 647000 Less: Taxes 0 0 Net Income 775000 647000 Number of Shares 170000 120000 EPS 4.56 5.39 Break even EBIT will be the point at which EPS under both plans is same Let it be x x/170000 = (x-128000)/120000 120000x = (x-128000)*170000 x = 435200 Hence, Break even EBIT = \$435,200

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