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Kelso Electric is an all-equity firm with 50,750 shares of stock outstanding. The company is considering...

Kelso Electric is an all-equity firm with 50,750 shares of stock outstanding. The company is considering the issue of $345,000 in debt at an interest rate of 7 percent and using the proceeds to repurchase stock. Under the new capital structure, there would be 31,500 shares of stock outstanding. Ignore taxes. What is the break-even EBIT between the two plans?

a- 54,573

b-39,518

c-68,974

d-63,668

e-44,458

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Answer #1

EBIT/50,750 = [EBIT-(345000*0.07)] / 31500

EBIT/50,750 = [EBIT-24150] / 31500

31500EBIT = 50750(EBIT-24150)

1225612500=50750EBIT-31500EBIT

1225612500=19250EBIT

EBIT = 63,668

The answer is d)

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