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 28,000 shares of stock. The debt and equity option would consist of 14,000 shares of stock plus $250,000 of debt with an interest rate of 7 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.

Options:

$24,500

$21,000

$17,500

$35,000

$8,750

Becker Industries is considering an all equity capital structure against one with both debt and equity. The all equity capital structure would consist of 28,000 shares of stock. The debt and equity option would consist of 14,000 shares of stock plus $250,000 of debt with an interest rate of 7 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.

Explanation / Answer

Breakeven EBIT:

EBIT÷28,000 = (EBIT-$250,000×7%)÷14,000

14×EBIT = 28×EBIT-$490,000

Breakeven EBIT = $35,000

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