Question

DAR 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 190,000 shares of stock outstanding. Under Plan II, there would be 140,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.

  

a.	If EBIT is $275,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

	EPS
Plan I	$
Plan II	$

    

b.	If EBIT is $525,000, what is the EPS for each plan? (Do not round intermediate calculations and 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, e.g., 1,234,567.)

  

Break-even EBIT

$

Answer 1

a)

	Plan I	Plan II
EBIT	275000	275000
less:Interest	0	(168000)   [2800000*.06]
EBT	275000	107000
lesS:tax	0	0
Net income	275000	107000
shares outstanding	190000	140000
Earning per share	275000/190000=$ 1.45	107000/140000=$ .76

b)

EBIT	525000	525000
less:Interest	0	(168000)   [2800000*.06]
EBT	525000	357000
lesS:tax	0	0
Net income	525000	357000
shares outstanding	190000	140000
Earning per share	525000/190000=2.76	357000/140000= 2.55

C)At breakeven ,EPS under both plans are equal .

In case of no taxes ,Breakeven EBIT is calculated as :EBIT /Shares outstanding under Plan I=[EBIT -Interest ]/shares outstanding under plan II

      EBIT /190000 = [EBIT -168000]/140000

      140000 EBIT /190000 = EBIT -168000

        .73684 EBIT = EBIT -168000

            EBIT -.73684 EBIT = 168000

             .26316 EBIT = 168000

EBIT = 168000/.26316

           = $ 638394.89 (ROUNDED TO 638,395)