P16-4 Break-Even EBIT [LO1] James Corporation is comparing two different capital
ID: 2643029 • Letter: P
Question
P16-4 Break-Even EBIT [LO1]
James 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 160,000 shares of stock outstanding. Under Plan II, there would be 80,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
If EBIT is $350,000, Plan I's EPS is $ while Plan II's EPS is $. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
If EBIT is $500,000, Plan I's EPS is $ and Plan II's EPS is $. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
The break-even EBIT is $. (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32.))
James 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 160,000 shares of stock outstanding. Under Plan II, there would be 80,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
Explanation / Answer
EPS = net income / average outstanding common shares
Net income = EBIT - Interest on debt
Net income plan I = $350,000 - ($2,800,000 x 0.08)
Net income plan I = $350,000 - $22,4000 = $126,000
EPS = $126,000 / 160,000 = $0.79 per share
Net income plan lI = $350,000 - ($2,800,000 x 0.08)
Net income plan I = $350,000 - $22,4000 = $126,000
EPS = $126,000 / 80,000 = $1.58 per share
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Net income plan I = $500,000 - ($2,800,000 x 0.08)
Net income plan I = $500,000 - $22,4000 = $276,000
EPS = $276,000 / 160,000 = $1.73 per share
Net income plan Il = $500,000 - ($2,800,000 x 0.08)
Net income plan I = $500,000 - $22,4000 = $276,000
EPS = $276,000 / 80,000 = $3.45 per share
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The break-even EBIT = $350,000 + $500,000 / 160,000 + 80,000
The break-even EBIT = $850,000 / 240,000 = $3.54
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