DAR Corporation is comparing two different capital structures: an all-equity pla

Question

DAR 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 155,000 shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock outstanding and $1.3 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.

  

If EBIT is $200,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

    

If EBIT is $450,000, what is the EPS for each plan? (Do not round intermediate calculations and 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, e.g., 1,234,567.)

  

DAR 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 155,000 shares of stock outstanding. Under Plan II, there would be 105,000 shares of stock outstanding and $1.3 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.

Explanation / Answer

Break Even EBIT

EBIT under plan 1 = EBIT under plan 2

X-0/ 155000 = X-(1300000*6%)/105000

X/155000 = X - 78000/105000

105000X = 155000(X-78000)

105000X = 155000X - (78000*155000)

50000X = (78000*155000)

X = 241800

Particulars All Equity Levered EBIT 200000 200000 Less: Interest 0 78000 EBT 200000 122000 Less: Tax 0 0 Earning available for equity 200000 122000 Number of shares 155000 105000 EPS                         1.29                                         1.16

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.