Rise Against Corporation is comparing two different capital structures: an all-e
ID: 2719559 • 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 $2.30 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.
If EBIT is $250,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
If EBIT is $500,000, 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 $2.30 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.
Explanation / Answer
Particulars Plan 1 all equity Plan 2 Levered Plan EBIT 250000 250000 Less: Interest 0 138000 EBT 250000 112000 Number of shares outstanding 205000 155000 Earning Per Share 1.22 0.72 Particulars Plan 1 all equity Plan 2 Levered Plan EBIT 500000 500000 Less: Interest 0 138000 EBT 500000 362000 Number of shares outstanding 205000 155000 Earning Per Share 2.44 2.34 Break Even EBIT EPS of plan 1 = EPS of Plan 2 (X-0)/205000=(X-138000)/155000 155000(X) = 205000(X-138000) 155000X = 205000X - 28290000000 X = 28290000000/50000 X = 565800
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