DAR Corporation is comparing two different capital structures: an all-equity pla

Question

DAR 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 190,000 shares of stock outstanding. Under Plan II, there would be 140,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.

What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

DAR 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 190,000 shares of stock outstanding. Under Plan II, there would be 140,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.

What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

Explanation / Answer

Solution:

TO compute the breakevn EBIT since No taxes hence EBT = Profit after tax

EBIT- 0(because no interest) /No of shares =( EBIT - Interest )/no of shares

= EBIT/190000 = EBIT- 2800000*6%/140000

EBIT /190000 = (EBIT - 168000)/140000

Cross multiply we get = 140000*(EBIT) = 190000*(EBIT - 168000)

= 190000*168000 = 190000EBIT - 140000EBIT

EBIT break even = (190000*168000)/50000

Therefore Breakeven EBIT = $638400

Thank you.

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