Answer:
Interest rate on debt is 12.40%
Explanation:
Since break-even EBIT $41,650 , the equation of the two capital structure can be written as below:
EPS under the first capital structure=EPS under the second capital structure
Generally EPS =EBIT/weighted average number of shares in an all equity financed structure like the first one
EPS=EBIT-(debt*interest rate)/weighted average number of shares in a mixed capital structure
$41,650/15,500=$41,650-($65000*interest rate)/12,500
by cross multiplication
41,650/15,500*12,500=41650-(65000*interest rate)
33588.71=41650-(65000*interest rate)
65000*interest rate=41650-33588.71
interest rate=(41650-33588.71)/65000
interest rate=12.40%
