Yasmin Corporation is comparing two different capital structures, an all-equity
ID: 2645575 • Letter: Y
Question
Yasmin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Yasmin would have 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $2.7 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes.
If EBIT is $375,000, what is the EPS for each plan? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).)
If EBIT is $625,000, what is the EPS for each plan? (Do not round intermediate calculations and round your final 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 (e.g., 1,234,567).)
Yasmin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Yasmin would have 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $2.7 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes.
Explanation / Answer
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Break-even EBIT level
Break-even EBIT level is the indifferent point where EPS under alternative financing plan is the same. Mathematically, the break-even EBIT level is:
(EBIT* - I1) (1
Plan I Plan II EBIT $375,000.00 $375,000.00 Interest $0.00 $135,000.00 EBT $375,000.00 $240,000.00 Less: Tax $0.00 $0.00 EAT/PAT $375,000.00 $240,000.00 No. of Share 185000 135000 EPS $2.03 $1.78Related Questions
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