Question

Kelso Electric is an all-equity firm with 57,500 shares of stock outstanding. The company is considering the issue of $390,000 in debt at an interest rate of 8 percent and using the proceeds to repurchase stock. Under the new capital structure, there would be 36,000 shares of stock outstanding. Ignore taxes. What is the break-even EBIT between the two plans? Multiple Choice $90,395 $52,242 $71,522 $58,772 $83,442

Answer 1

To break-even under the two plans,EBIT figyre should satisfy the following :
Earnings per share =(EBIT-Interest)/No.of shares-- must be the same under both capital structure
So, calculating EPS under both plans,
All Equity
EBIT	90395	52242	71522	58772	83442
No.of equity shares	57500	57500	57500	57500	57500
EPS=EBT/No.of shares	1.5721	0.9086	1.2439	1.0221	1.4512
Equity+Debt
EBIT	90395	52242	71522	58772	83442
Less: Interest at 8%*390000	31200	31200	31200	31200	31200
EBT	59195	21042	40322	27572	52242
No.of equity shares	36000	36000	36000	36000	36000
EPS=EBT/No.of shares	1.6443	0.5845	1.1201	0.7659	1.4512
EPS is the same $ 1.4512 when EBIT is $ 83442
So, the break-even EBIT is $ 83442
ANSWER:
$83,442