Vapid Motors Inc. is considering a change to its capital structure. Selected fin

Question

Vapid Motors Inc. is considering a change to its capital structure. Selected financial information is provided in the table below. The current capital structure is shown in the column labeled 'Current'. Vapid is trying to choose between two financing alternatives. Under Option A, they will sell 69.11 new shares at the current price. Under Option B, they will borrow dollar 500 at 10 percentage. There are currently 800 shares outstanding, and the firm has dollar 800 of debt at 10 percentage. The tax rate is 50 percentage. What is the EBIT-EPS indifference point? The EBIT-EPS indifference point is dollar

Explanation / Answer

EPS (equity financing) = EPS (debt financing)

(EBIT - Interest)(1-tax rate) /No of shares out standing Under Option A=(EBIT - Interest)(1-tax rate) /No of shares out standing Under Option B

(EBIT - $80)(1-0.5) /869.11 shares Under Option A=(EBIT - 130)(1-0.5) /800 sharesUnder Option B

(0.5EBIT - $40)/869.11 = 0.5EBIT - 65/ 800

(0.5EBIT - $40)* 800=(0.5EBIT - $65)*869.11

400EBIT -$32,000 =434.56 EBIT - $56492.15

34.56 EBIT = $24,492.15

EBIT = $708.68

EBIT -EPS indifferent point is $708.68.

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