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 205,000 shares of stock outstanding. Under Plan II, there would be 155,000 shares of stock outstanding and $2.30 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes.

A.

If EBIT is $250,000, what is the EPS for each plan?

1 and 2

B

If EBIT is $500,000, what is the EPS for each plan?

1 and 2

C

What is the break-even EBIT?

If EBIT is $250,000, what is the EPS for each plan?

1 and 2

B

If EBIT is $500,000, what is the EPS for each plan?

1 and 2

C

What is the break-even EBIT?

Explanation / Answer

EPS = (EBIT - Interest) / Shares

$250,000 / 205,000 = $1.22

($250,000 - 0.06*2,300,000) / 155,000 = $0.723

$500,000 / 205000 = $2.44

($500,000 - 0.06*2,300,000) / 155,000 = $2.34

If (X/205000) = (X - 0.06*2,300,000)/155000

X = 1.323X - 182516.13

So, X = $565801

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