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 170,000 shares of stock outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and $1.60 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

If EBIT is $525,000, what is the EPS for each plan?

If EBIT is $775,000, what is the EPS for each plan?

What is the break-even EBIT?

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

EPS = Net Income/Shares Outstanding

Plan 1 = 525000/170000 = $3.09 per share

Plan 2 = (525000 - 1600000*8%)/120000 = $3.31 per share

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Part B:

EPS = Net Income/Shares Outstanding

Plan 1 = 775000/170000 = $4.56 per share

Plan 2 = (775000 - 1600000*8%)/120000 = $5.39 per share

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Part C:

EBIT/170000 = (EBIT - 8%*1600000)/120000

(120000*EBIT)/170000 = EBIT - 128000

.71EBIT = EBIT - 128000

Break Even EBIT = 128000/.71 = $181333.33

Thanks.

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