Question

kelso electric is an all-equity firm with 55,250 shares of stock outstanding. the company is considering the issue of $375,000 in debt at an interest rate of 9 percent and using the proceeds to repurchase stock. under the new capital structure, there would be 34,500 shares of stock outstanding. ignore taxes. what is the break-even ebit between the two plans?

Answer 1

Break even EBIT between two plans  = $89864.46

What is EBIT?
EBIT (earnings before interest and taxes) is a measure of a company's profitability. EBIT is calculated as revenue less expenses minus tax and interest. Able to operate earnings, operating profit, and financial gains before interest and taxes are other terms for EBIT. EBIT is synonymous with operating income because it measures the profit generated by a company's operations. EBIT focuses exclusively on a company's ability to generate income from operations by ignoring variables such as tax burden and capital structure by ignoring taxes and interest expense. EBIT is a particularly useful metric for determining a company's capacity to generate enough earnings to be lucrative, pay down debt, and fund current operations.

All Equity firm
Earning per share (EPS) = EBIT ( 1- tax ) / number of shares outstanding
EPS = EBIT(1-0)/ 55250
EPS= EBIT/55250
Plan 2: Debt - Equity firm
EPS = (EBIT- Interest) (1-tax) / number of shares outstanding
EPS= (EBIT- 375000*9%)(1-0)/34500
EPS= (EBIT-33750)/34500

At break even level of EBIT
EBIT/55250 = (EBIT-33750)/34500
34500EBIT= 55250*EBIT-1864687500
1864687500= EBIT(55250-34500)
EBIT= 1864687500/20750= $89864.46
Break even EBIT between two plans  = $89864.46

To learn more about EBIT
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