Ski and Board are two identical firms of identical size operating in identical m

Question

Ski and Board are two identical firms of identical size operating in identical markets. Ski is unlevered with assets valued at $11000 and has 550 shares of stock outstanding. Board also has $11000 in assets and has $7000 in debt financed at an interest rate of 5.50% and has 200 shares of stock outstanding. Assume perfect capital markets. Calculate the level of EBIT that would make earnings per share the same for Ski and Board. $

Place your answer to the nearest dollar. If applicable, your answer should NOT include a comma

Explanation / Answer

Given, no taxes so tax rate,t=0

Ski:

EBIT=x

Net Income=x*(1-t)=x

EPS=x/550

Board:

EBIT=x

Interest=7000*5.5%=385

Net Income=(x-385)*(1-t)=x-385

EPS=(x-385)/200

So, x/550=(x-385)/200

x(1-200/550)=385

=>x=605

$605 EBIT would make earnings per share the same for Ski and Board.

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