Question

Byrd 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 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.7 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes. a. If EBIT is $325,000, 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 $575,000, 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

Answer 1

Plan II 325,000 85,000 =1700000*5% 240,000 a) Plan Plan II $ $ 1.86 1.92 Plan Expected EBIT $ 325,000 $ Less: Interest $ - $ Profit before tax $ 325,000 $ Less: Tax $ - $ Earnings to equity share holders $ 325,000 $ - Number of equity shares L 175,000 $ EPS $ 1.86 $ b) Plan Plan II $ $ 3.29 3.92 240,000 125,000 1.92 c) Breakeven EBIT $ 297,500 Plan II 575,000 85,000 490,000 Plan Expected EBIT $ 575,000 $ Less: Interest $ - $ Profit before tax $ 575,000 $ Less: Tax Earnings to equity share holders $ 575,000 $ --Number of equity shares L 175,000 EPS $ 3.29 $ 490,000 125,000 3.92 Breakeven EBIT: EBIT:175,000 = (EBIT-$85,000):125,000 EBITX125 = 175xEBIT-$14,875,000 Breakeven EBIT = $297,500

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