Question

Kyle Corporation is comparing two diferent captal structures outstanding. Under Plan Il, there wouid be 470,000 s s, an allequity plan (Plan 1) and a levered plan (Plan II) Under Plan I, the company would have 720,000 shares of stock shares of stock outstanding and $7 milion in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes a. Assume that EBIT is $1.7 million. Compute the EPS for both Plan 1 and Plan II (Do not round i intermediate calculations and round your answers to 2 decimal places, 32.16) EPS Plan I Plan b. Assume that EBIT is $3.2 milion. Compute the EPS for both Pian I and Plan II. (Do not round intermediate calculations and round your answers to 2 decimal Plan I Plan II . What is the break-oven EBIT? (Do not round intermediate calculations nearest whole number,9.32) and enter your answer in dollars, not millions of dollars,.g. 1,234,567. Round your answer to the Break-even EBIT

Answer 1

a)

Plan 1

EPS = EBIT/shares = 1700000/720000=2.36

Plan 2

EPS = (EBIT-interest rate*debt)/shares = (1700000-0.1*7000000)/470000=2.13

b)

Plan 1

EPS = EBIT/shares = 3200000/720000=4.44

Plan 2

EPS = (EBIT-interest rate*debt)/shares = (3200000-0.1*7000000)/470000=5.32

c)Break even EBIT is the EBIT where EPS plan I = EPS plan II

EBIT/shares = (EBIT-interest rate*debt)/shares

EBIT/720000=(EBIT-0.1*7000000)/470000

EBIT = 2016000