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Brrunno [24]
3 years ago
9

Round Hammer 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 200,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $3 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
a. If EBIT is $675,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b. If EBIT is $925,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Business
1 answer:
emmasim [6.3K]3 years ago
3 0

Answer:

a. If EBIT is $675,000, what is the EPS for each plan?

  • Plan I: EPS = $675,000 / 200,000 = $3.38 per stock
  • Plan II: EPS = ($675,000 - $240,000) / 150,000 = $2.90 per stock

b. If EBIT is $925,000, what is the EPS for each plan?

  • Plan I: EPS = $925,000 / 200,000 = $4.63 per stock
  • Plan II: EPS = ($925,000 - $240,000) / 150,000 = $4.57 per stock

c. What is the break-even EBIT?

  • $960,000

Explanation:

Plan I:

  • 200,000 outstanding stocks

Plan II:

  • 150,000 outstanding stocks
  • $3,000,000 in outstanding debt (8% interest rate)

break even EBIT

x / 200,000 = (x - 240,000) / 150,000

x = 200,000(x - 240,000) / 150,000

x = 1.3333(x - 240,000)

x = 1.3333x - 320,000

320,000 = 1.3333x - 1

320,000 = 0.3333x

x = 320,000 / 0.3333 = $960,000

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