Question

i need a b and c. Please write it by hand and explain. Thank you so much

LO 1 4. Break-Even EBIT. Kyle Corporation is comparing two different capital structures, an all-equity plan (Plan 1) and a levered plan (Plan II). Under Plan I, the company would have 300,000 shares of stock outstanding. Under Plan II, there would be 210,000 shares of stock outstanding and $2,367,000 in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes. a. If EBIT is $600,000, which plan will result in the higher EPS? b. If EBIT is $900,000, which plan will result in the higher EPS? c. What is the break-even EBIT?

Answer 1

EPS=(EBIT-Debt*interest rate)*(1-tax rate)/Number of shares

As there are no taxes, tax rate=0

1.
Plan I=(600000)/300000=2.00

Plan II=(600000-2367000*10%)/210000=1.73

Plan I results in the higher EPS

2.
Plan I=(900000)/300000=3.00

Plan II=(900000-2367000*10%)/210000=3.158571429

Plan II results in the higher EPS

3.
Breakeven EBIT is where EPS for both plans is same
=Debt*interest rate/(1-Shares in Debt Plan/Shares in Equity Plan)
=2367000*10%/(1-210000/300000)
=789000