Rise Against Corporation is comparing two different capital structures: an all-e

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 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $1.90 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes.

If EBIT is $425,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

If EBIT is $675,000, 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 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $1.90 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes.

Explanation / Answer

Plan 1 Plan 2 a EBIT                            4,25,000.00 4,25,000.00 less Interest (1900000*7%) 1,33,000.00 Net Income                            4,25,000.00 2,92,000.00 No of Shares OS 185000 135000 EPS                                          2.30                 2.16 b Plan 1 Plan 2 EBIT                            6,75,000.00 6,75,000.00 less Interest (1900000*7%) 1,33,000.00 Net Income                            6,75,000.00 5,42,000.00 No of Shares OS 185000 135000 EPS                                          3.65                 4.01 c Break Even Point=Interest Expense/Difference in No of shares 133000/(185000-135000) 2.66

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