Question

Problem 16-4 Break-Even EBIT [LO1] 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 165,000 shares of stock outstanding. Under Plan II, there would be 115,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. a. If EBIT is $600,000, 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 $850,000, 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.)

Answer 1

1500000 8% Interest 120000 All-equity plan (Plan I) All-equity plan (Plan ) levered plan (Plan II) 8.50,000.00 $ levered plan (Plan II) A 6,00,000.00 $ $ $ EBIT EBIT 8,50,000.00 6,00,000.00 $ $ $ interest 1,20,000.00 interest 1,20,000.00 6,00,000.00 $ 8,50,000.00 $ EAT No.of shares $ EAT 7,30,000.00 4,80,000.00 No.of shares 115000 115000 165000 165000 3.64 $ EPS EPS $ 4.17 5.15 6.35 Break Even level EBIT All-equity plan (Plan I) levered plan (Plan II) 3,96,000.00 $ (EBIT-120000)/115000 (EBIT-120000) 165000 EBIT/165000 $ 115000EBIT 3,96,000.00 EBIT interest $ $ 1,20,000.00 115000EBIT 165000EBIT-19800000000 3,96,000.00 $ 165000 $ No.of shares EAT 165000EBIT-115000EBIT 19,80,00,00,000 2,76,000.00 19,80,00,00,000 3,96,000 50000ЕBIT 115000 2.40 $ EPS $ EBIT 2.40