Homework Answers
a)
EBIT/Number of shares = (EBIT - Interest)/Number of shares
EBIT/210,000 = (EBIT - (2,280,000 * 8%))/150,000
150,000 * EBIT = 210,000 * (EBIT - 182,400)
Divide both side by 10,000
15 * EBIT = 21 * (EBIT - 182,400)
15 * EBIT = (21 * EBIT) - 3,830,400
(21 * EBIT) - (15 * EBIT) = 3,830,400
6 * EBIT = 3,830,400
EBIT = 3,830,400 / 6
EBIT = 638,400.
Break even EBIT = 638,400.
b)
Value of the Unlevered firm = Value of levered firm
Let X = share price
210,000 * X = (150,000 * X) + 2,280,000
(210,000 * X) - (150,000 * X) = 2,280,000
60,000 * X = 2,280,000
X = 2,280,000 / 60,000
X = 38
Share price = $38.
c)
Value of the unlevered firm = 210,000 * 38 = 7,980,000
Value of the levered firm = (150,000 * 38) + 2,280,000 =
7,980,000
Both firm will have same value.
Value of firm = 7,980,000.
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