Yasmin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Yasmin would have 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $2.7 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes. |
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).) |
Break-even EBIT | $ |
At breakeven point the Earnings Per Share (EPS) of both the plans will be equal | |
EPS of Plan I = EPS of Plan II | |
EBIT / Number of shares = (EBIT - Interest) / Number of shares | |
EBIT / 185000 = (EBIT - 2700000*5%) / 135000 | |
EBIT / 185000 = (EBIT - 135000) / 135000 | |
135000 * EBIT / 185000 = EBIT - 135000 | |
135/185*EBIT = EBIT - 135000 | |
135000 = EBIT - 135/185*EBIT | |
135000 = (185-135)/185*EBIT | |
135000 = 50/185*EBIT | |
EBIT = 135000*185/50 | 499500 |
break-even EBIT | 499500 |
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