* I need help figuring out the cross multiplication here, please show the steps!
ID: 2734122 • Letter: #
Question
* I need help figuring out the cross multiplication here, please show the steps! I keep getting the wrong answer for the EBIT of 500,000*
taxes at 30%
No Debt
Assets
$5,000,000
Debt
-
Equity
5,000,000
Share price
$10
Shares outstanding
500,000
Interest Rate
D = E
D/E = 1
Assets
$5,000,000
Debt
2,500,000
Equity
2,500,000
Share price
$10
Shares outstanding
250,000
Interest Rate
10%
-
EPS with no debt = EPS with debt
EBIT (1 - t) / shares = (EBIT - interest expense) (1-t) / shares
EBIT(1 - .3) / 500,000 = (EBIT - 250,000)(1 - .3) / 250,000
.7 EBIT = 1.4 EBIT - 350,000
EBIT = $500,000
No Debt
Assets
$5,000,000
Debt
-
Equity
5,000,000
Share price
$10
Shares outstanding
500,000
Interest Rate
D = E
D/E = 1
Assets
$5,000,000
Debt
2,500,000
Equity
2,500,000
Share price
$10
Shares outstanding
250,000
Interest Rate
10%
-
Explanation / Answer
EPS without debt = EPS with debt
EBIT (1-T)/500000 = EBIT- Interest ( 1-T)/250000
EBIT ( 0.70)/500000 =( EBIT - 250000)*0.70/250000
0.70EBIT/500000 = 0.70EBIT-175000/250000
0.70EBIT*250000=500000(0.70EBIT-175000)
175000EBIT = 350000EBIT - (500000*175000)
175000EBIT = 500000*175000
EBIT = 500000
Correct answer to the question is 500000
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