Rise Against Corporation is comparing two different capital structures: an all-e

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 150,000 shares of stock outstanding. Under Plan II, there would be 100,000 shares of stock outstanding and $1.20 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.

  

If EBIT is $300,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

  

    

If EBIT is $550,000, 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.)

  

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 150,000 shares of stock outstanding. Under Plan II, there would be 100,000 shares of stock outstanding and $1.20 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.

Explanation / Answer

a)

B)

C)At break even ,EPS under both plans are equal :

EPS for plan I = EBIT /number of shares = EBIT /150000

EPS for plan II = (EBIT -60000) / 100000

EBIT /150000 = (EBIT -60000)/100000

EBIT = 150000(EBIT -60000)/100000

EBIT = 1.5EBIT - 90000

1.5EBIT -EBIT = 90000

     .5 EBIT = 90000

    EBIT = 90000/.5

     EBIT = $ 180000

Plan I Plan II EBIT 300000 300000 less:Interest (1200000*.05) -60000 EBT or EAT as there are no taxes   [A] 300000 240000 Number of shares [B] 150000 100000 EPS    [A/B] 2 2.4

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