Rolston Corporation is comparing two different capital structures, an all-equity

Question

Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 127,500 shares of stock outstanding. Under Plan II, there would be 85,000 shares of stock outstanding and $1.275 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

Requirement 1:

If EBIT is $268,000, calculate the EPS for each plan. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

Earnings per share under plan I $
Earnings per share under plan II $

Requirement 2:

If EBIT is $1,071,000, calculate the EPS for each plan. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

Earnings per share under plan I $
Earnings per share under plan II $

Requirement 3:
Calculate the break-even EBIT? (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32))

Earnings before interest and corporate taxes $

Please show the detail of how to calcuale the break even EBIT

Explanation / Answer

The breakeven level of EBIT occurs when the capitalization plans result in the same EPS. The EPS is calculated as: EPS = (EBIT

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