2 Problem 14-4 Break-Even EBIT Hale Corporation is comparing two different capit

Question

2 Problem 14-4 Break-Even EBIT Hale Corporation is comparing two different capital structures, an all-equity plan (Plan ID and a levered plan (Plan I). Under Plan 1, the company would have 150,000 shares of stock outstanding. Under Plan II, there would be 100,000 shares of stock outstanding and $12 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes 10 points a. If EBIT is $300,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal Skpped places, e.g, 32.16.) Plan I Plan II eBook b. If EBIT is $550,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimel places, e.g. 32.16.) Print Plan I Plan II References c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollers, not millions of dollars, e.g 1,234,567) Break-even EBIT $ Reference links 14 5 Tavas

Explanation / Answer

Under plan 1, there wont be any interest expense and in plan 2, interest expense will be $1,2M *5%=$60,000

there are no taxes

a) EPS = (EBIT-interest-tax)/no of shares outstanding

EPS under plan 1 = ($300,000-0-0)/150,000= $2 per share

EPS under plan 2 = ($300,000-$60,000-0)/100,000=$2.4 per share

b)

EPS under plan 1 = ($550,000-0-0)/150,000= $3.67 per share

EPS under plan 2 = ($550,000-$60,000-0)/100,000=$4.90 per share

c)

break even EBIT is when (EBIT-0-0)/150,000=(EBIT-$60,000-0)/100,000

solving this equation, we get break even EBIT as $180,000

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