Rise Against Corporation is comparing two different capital structures: an all-e
ID: 2645317 • 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 205,000 shares of stock outstanding. Under Plan II, there would be 155,000 shares of stock outstanding and $3.10 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
If EBIT is $600,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
If EBIT is $850,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
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.)
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 205,000 shares of stock outstanding. Under Plan II, there would be 155,000 shares of stock outstanding and $3.10 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
If EBIT is $600,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
If EBIT is $850,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
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.)
Explanation / Answer
We know that
EPS= Earnings After Tax/ No of Stocks
EPS= ( EBIT- Interest) (1- Tax Rate)/ No of Stocks
Calculation of EPS in Case-1
Particulars
Plan-1
Plan-2
No of Stocks
205000
155000
Debt
0
3100000
Interest on Debt@ 8%
0
248000
EBIT
600000
600000
EBIT- Intersest ( EBT)
600000
352000
Tax
0
0
EAT
600000
352000
EPS ( EAT/ No of Stock)
$2.93
$2.27
Calculation of EPS in Case-II
Particulars
Plan-1
Plan-2
No of Stocks
205000
155000
Debt
0
3100000
Interest on Debt@ 8%
0
248000
EBIT
850000
850000
EBIT- Intersest ( EBT)
850000
602000
Tax
0
0
EAT
850000
602000
EPS ( EAT/ No of Stock)
$4.15
$3.88
Break
Particulars
Plan-1
Plan-2
No of Stocks
205000
155000
Debt
0
3100000
Interest on Debt@ 8%
0
248000
EBIT
600000
600000
EBIT- Intersest ( EBT)
600000
352000
Tax
0
0
EAT
600000
352000
EPS ( EAT/ No of Stock)
$2.93
$2.27
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