Rise Against Corporation is comparing two different capital structures: an all-e
ID: 2741899 • 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 180,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $1.80 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.
If EBIT is $225,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
If EBIT is $475,000, 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.)
a.
If EBIT is $225,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
Explanation / Answer
Answer to Part a :
Particulars
Plan I
Plan II
EBIT
225,000
225,000
Less: Interest
0
108,000
EBT
225,000
117,000
Less: Tax
0
0
EAT
225,000
117,000
No of Stock outstanding
180,000
130,000
EPS
(EAT/No of Stock outstanding)
$ 1.25
$ 0.90
Answer to Part b :
Particulars
Plan I
Plan II
EBIT
475,000
475,000
Less: Interest
0
108,000
EBT
475,000
367,000
Less: Tax
0
0
EAT
475,000
367,000
No of Stock outstanding
180,000
130,000
EPS
(EAT/No of Stock outstanding)
$ 2.64
$ 2.82
Answer to Part c :
At Break -even EBIT, EPS of Plan I will be equal to EPS of Plan II
EPS of Plan I = EPS of Plan II
EBIT / No of Shares outstanding = (EBIT – Interest)/ No of Shares Outstanding
EBIT / 180,000 = (EBIT – 108,000) / 130,000
EBIT = $ 388,800
Therefore, Break even EBIT is $ 388,800
Particulars
Plan I
Plan II
EBIT
225,000
225,000
Less: Interest
0
108,000
EBT
225,000
117,000
Less: Tax
0
0
EAT
225,000
117,000
No of Stock outstanding
180,000
130,000
EPS
(EAT/No of Stock outstanding)
$ 1.25
$ 0.90
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