Question

Demolition Construction Services has 12,500 shares of stock outstanding and no debt. The new CFO is considering issuing $75,000 of debt and using the proceeds to retire 2,500 shares of stock. The coupon rate on the debt is 6.8 percent. What is the break-even level of earnings before interest and taxes between these two capital structure options? Please explain thoroughly step-by-step of how to find the COE = $25,500

A) $16,860

B) $18,520

C) $18,240

D) $25,500

E) $15,300

Answer 1

Shares Repurchased Interest 2500 $ 5,100.00 75000*6.8% Break Even Level EBIT EBIT/12500 10000EBIT 10000EBIT 2500EBIT EBIT (EBIT-5100)/10000 (EBIT-5100) *12500 12500EBIT-63750000 6,37,50,000 25,500 All-equity plan (Plan I) levered plan (Plan II) EBIT 25,500.00 $ 25,500.00 interest $ 5,100.00 EAT $ 25 500 25,500.00 $ 20,400.00 No.of shares 12,500.00 10000 EPS 2.04 $ 2.04