Question

Rise Against Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 155,000 shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock outstanding and $1.30 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.

  

a.	If EBIT is $200,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

  

	EPS
Plan I	$
Plan II	$

    

b.	If EBIT is $450,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

  

	EPS
Plan I	$
Plan II	$

   

c.	What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

  

Break-even EBIT

$

Answer 1

	Plan I	Plan II
EBIT	200,000	200,000
Less: Interest	0	78,000
EBT	200,000	122,000
Less: Taxes	0	0
Net Income	200,000	122,000
Number of shares	155,000	105,000
EPS	1.29	1.16
b.
	Plan I	Plan II
EBIT	450,000	450,000
Less: Interest	0	78,000
EBT	450,000	372,000
Less: Taxes	0	0
Net Income	450,000	372,000
Number of shares	155,000	105,000
EPS	2.90	3.54
Break even EBIT is the point at which EPS under both plans is same
Let it be x
x/155000 = (x-78000)/105000
x = 241,800
i.e. $241,800