Question

Northwestern Lumber Products currently has 15,000 shares of stock outstanding. Patricia, the financial manager, is considering issuing $120,000 of debt at an interest rate of 6.1 percent. Given this, how many shares of stock will be outstanding once the debt is issued if the break-even level of EBIT between these two capital structure options is $60,000

Answer 1

Answer:

The outstanding share is $13,170

Explanation:

In this question, we compare the two capital structure option which is presented below:

{Capital structure ÷ outstanding shares} = {capital structure - (debt × interest rate) ÷ outstanding shares}

{$60,000 ÷ 15,000 shares} = {$60,000 - ($120,000 × 6.1%) ÷ outstanding shares}

{$60,000 ÷ 15,000 shares} = {($60,000 - $7,320) ÷ outstanding shares}

{$60,000 ÷ 15,000 shares} = $52,680 ÷ outstanding shares

$4 per share = $52,680 ÷ outstanding shares

So, the outstanding shares = $52,680 ÷   $4 per share

                                             = $13,170 shares