Ski and Board are two identical firms of identical size operating in identical m

Question

Ski and Board are two identical firms of identical size operating in identical markets. Ski is unlevered with assets valued at $8000 and has 400 shares of stock outstanding. Board also has $8000 in assets and has $4000 in debt financed at an interest rate of 6.00% and has 200 shares of stock outstanding. Assume perfect capital markets.

Calculate the level of EBIT that would make earnings per share the same for Ski and Board. $ Place your answer to the nearest dollar. If applicable, your answer should NOT include a comma

Explanation / Answer

EPS of Ski = EPS of Board

EPS= Net Income/ Number of shares outstanding

So, Net Income of Ski/400 = Net Income of Board/ 200

Net Income of Ski= EBIT since there is no interest and tax.

Net Income of Board= EBIT- Interest = EBIT- 4000*6% = EBIT- 240

Hence

EBIT/ 400 = (EBIT-240)/200

EBIT= 2EBIT- 480

EBIT= $480

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