Question

Alpha Company is looking at two different capital​ structures, one an​ all-equity firm and the other a levered firm with ​$4.6 million of debt financing at 14​% interest. The​ all-equity firm will have a value of ​$9.2 million and 460 comma 000 shares outstanding. The levered firm will have 230 comma 000 shares outstanding. a. Find the​ break-even EBIT for Alpha Company using EPS if there are no corporate taxes. a. What is the​ break-even EBIT for Alpha Company using EPS if there are no corporate​ taxes?

Answer 1

Answer:

The break-even EBIT using EPS is $1,288,000.

Explanation:

the break-even EBIT using EPS is the EBIT that will brings EPS under two different capital structure equal.

Denot X is the EBIT.

* We have:

+ EPS in all-equity firm = X/460,000

+ EPS in levered firm = ( X - interest rate)/230,000 = ( X - 4,600,000 x 14%)/230,000 = (X - 644,000) / 230,000.

* We have the equation:

X/460,000 = (X-644,000)/230,000 <=> X/460,000 = 2.8 <=> X = $1,288,000.

So, the break-even EBIT using EPS is $1,288,000.