Current | Plan 1 | Plan 2 | |
EBIT | 9,000,000 | 11,250,000 | 11,250,000 |
Less: Interest | 160,000 | 160,000 | 520,000 |
EBT | 8,840,000 | 11,090,000 | 10,730,000 |
Less: Taxes | 3,536,000 | 4,436,000 | 4,292,000 |
Net Income | 5,304,000 | 6,654,000 | 6,438,000 |
Number of Shares | 1,000,000 | 1,500,000 | 1,000,000 |
EPS | 5.304 | 4.436 | 6.438 |
Indifference point is the point at which EPS under both the plans is same | |||
Let indifference EBIT be x | |||
(x-160,000)(1-40%)/1,500,000 = (x-520,000)(1-40%)/1,000,000 | |||
(0.6x - 96000)*1,000,000 = (0.6x-312000)*1500,000 | |||
=-300000*-372000000000 | |||
x = $1,240,000 | |||
i.e. When EBIT is $1,240,000 | |||
and EPS = $0.432 | |||
Debt financing | |||
Increase | |||
Plan 1 | Plan 2 | ||
EBIT | 6,000,000 | 6,000,000 | |
Less: Interest | 160,000 | 520,000 | |
EBT | 5,840,000 | 5,480,000 | |
Less: Taxes | 2,336,000 | 2,192,000 | |
Net Income | 3,504,000 | 3,288,000 | |
Number of Shares | 1,500,000 | 1,000,000 | |
EPS | 2.336 | 3.288 | |
Plan 2 |
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