Becker Industries is considering an all equity capital structure against one wit

Question

Becker Industries is considering an all equity capital structure against one with both debt and equity. The all equity capital structure would consist of 42,000 shares of stock. The debt and equity option would consist of 21,000 shares of stock plus $285,000 of debt with an interest rate of 8 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.

$22,800

$45,600

$47,880

$24,600

$11,400

Becker Industries is considering an all equity capital structure against one with both debt and equity. The all equity capital structure would consist of 42,000 shares of stock. The debt and equity option would consist of 21,000 shares of stock plus $285,000 of debt with an interest rate of 8 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.

Explanation / Answer

Let break-even EBIT be $x.

For achieving break-even, EPS in both capital structure should be same.

EPS in all equity structure = x/42,000

EPS in mixed structure = (x-22,800)/21,000

Therefore,

x/42,000 = (x-22,800)/21,000

x = $45,600

Therefore, Break-even EBIT is $45,600

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