Rise Against Corporation is comparing two different capital structures: an all-e

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 200,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $2.20 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.

a. If EBIT is $350,000, 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 $600,000, 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 $

Explanation / Answer

Plan I shares outstanding = 200,000 .
Plan II, shares outstanding = 150,000
debt outstanding = $2.20 million ; Interest Rate = 5%

A)   EBIT = $350,000
Interest = $2.20 million x .05 = $110,000
Plan I EPS = EBIT / N1 = (350,000/200,000) = $1.75
Plan II EPS = (EBIT - I)/N2 = (240,000/150,000) = $1.6

B) EBIT = $600,000
Interest = $2.20 million x .05 = $110,000
Plan I EPS = EBIT / N1 = (600,000/200,000) = $3
Plan II EPS = (EBIT - I)/N2 = (490,000/150,000) = $3.27

C) Beak even EBIT is when EPS is same for both the plans.
( EBIT/N1) = (EBIT -I)/N2
(EBIT/200,000) = (EBIT - 110,000)/150,000
(EBIT/4) = (EBIT - 110,000)/3
3*EBIT = 4*EBIT - 440,000
EBIT = $440,000
Break Even EBIT = $440,000

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.