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 155,000 shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock outstanding and $1.3 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes.

  

a.	If EBIT is $200,000, 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 $450,000, 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 and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

a.	Plan I	$1.29
	Plan II	$1.16
b.	Plan I	$2.90
	Plan II	$3.54
c.	Break-even EBIT	???

Please help find answer C. the break-even EBIT.

Answer 1

Interest 1300000*6% 78000 - $ EBIT interest EAT No.of shares EPS All-equity plan (Plan I) levered plan (Plan II) 2,00,000.00 $ 2,00,000.00 78,000.00 2,00,000.00 $ 1,22,000.00 155000 105000 1.29 $ 1.16 All-equity plan (Plan I) levered plan (Plan II) |EBIT $ 4,50,000.00 $ 4,50,000.00 interest - $ 78,000.00 EAT 4,50,000.00 $ 3,72,000.00 No.of shares 155000 105000 EPS 2.90 $ 3.54 Break Even level EBIT EBIT/155000 105000EBIT 105000EBIT 155000EBIT-105000EBIT 50000EBIT EBIT (EBIT-78000)/105000 (EBIT-78000) *155000 155000EBIT-12090000000 12,09,00,00,000 12,09,00,00,000 2,41,800 All-equity plan (Plan I) levered plan (Plan II) |EBIT S 2,41,800.00 $ 2,41,800.00 interest - $ 78,000.00 EAT 2,41,800.00 $ 1,63,800.00 No.of shares 155000 105000 EPS $ 1.56 $ 1.56