Question

3 Round Hammer is comparing two different capital structures: An all-equity plan (Plan I) and a levered plan (Plan Il). Under Plan I, the company would have 205,000 shares of stock outstanding. Under Plan II, there would be 155,000 shares of stock outstanding and $2.3 million in debt outstanding. The interest rate on the debt is 6 percent, and 2 there are no taxes. points a. If EBIT is $250,000, 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 $500,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) 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.) еВook C. Hint Ask Plan I EPS Plan II EPS Plan I EPS b. Print Plan II EPS Break-even EBIT C.

Answer 1

Plan II 250,000 138,000 =2300000*6% 112,000 la) Plan | Plan II. $ $ 1.22 0.72 Plan | Expected EBIT $ 250,000 $ Less: Interest $ - $ Profit before tax $ 250,000 Less: Tax $ - $ Earnings to equity share holders $ 250,000 $ - Number of equity shares 205,000 $ EPS $ 1.22 $ b) Plan 1 Plan II 2.44 2.34 $ 112,000 155,000 0.72 c) Breakeven EBIT $ 565,800 Plan II 500,000 138,000 362,000 Plan Expected EBIT $ 500,000 $ Less: Interest $ - $ Profit before tax $ 500,000 $ Less: Tax IS - $ Earnings to equity share holders $ 500,000 $ = Number of equity shares 205,000 EPS $ 2.44 $ 362,000 155,000 2.34 Breakeven EBIT: EBIT:205,000 = (EBIT-$138,000): 155,000 EBITX155 = 205xEBIT-$28,290,000 Breakeven EBIT = $565,800

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