Rise Against Corporation is comparing two different capital structures: an all-e
ID: 2526777 • Letter: R
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 210,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $2.28 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
A. If EBIT is $500,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
EPS Plan I = $
EPS Plan II=$
B. If EBIT is $750,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
EPS Plan I = $
EPS Plan II=$
C. What is the break-even EBIT? (Enter your answer in dollars, not millions of dollars, i.e., 1,234,567.)
Break-even EBIT=$
Explanation / Answer
A.
*Calculation of EPS under plan I:
EPS= NET PROFIT / TOTAL OUTSTANDING SHARE
=500,000 / 210,000
=$ 2.38
* Calculation of EPS under plan II
NET PROFIT/ LOSS= EBIT - INTEREST
=500,000-(22800000* 8%)
=500000-1824000
= -$1324000
EPS= -1324000 / 150,000
=$ -8.82
EPS Plan I=$2.38
EPS Plan II=$-8.82
B.
*Calculation of EPS under Plan I
EPS= NET PROFIT / TOTAL OUTSTANDING SHARE
= 750,000 / 210,000
=$ 3.57
*Calculation of EPS under plan II
NET PROFIT= EBIT - INTERST
=750,000 - (22800000 * 8%)
= 750,000 - 1824000
=$ - 1074000
EPS= -1074000 / 150,000
= -7.16
EPS Plan I=$3.57
EPS Plan II=$ -7.16
C. Calculation of break even EBIT:
Break even EBIT when EBIT 500,000 =
=EBIT/ 210,000= EBIT-1824000/ 150,000
=EBIT =210,000/150,000 (EBIT-1824000)
= EBIT = 1.4 EBIT -2253600
=.4 EBIT= -2253600
= EBIT= -2253600/ .4
= EBIT = $-6,384,000
Break even EBIT = $ -6,384,000
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