Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 1172187 • Letter: K
Question
Kyle Corporation 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 765,000 shares of stock outstanding. Under Plan II, there would be 515,000 shares of stock outstanding and $9.25 million in debt outstanding. The interest rate on the debt is 12 percent, and there are no taxes.
c. What is the break-even EBIT? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.)
Explanation / Answer
Answer:
Let breakeven EBIT be $x
Plan I:
Number of shares = 765,000
EPS = [EBIT - Interest Expense] / Number of shares
EPS = [$x - $0] / 765,000
EPS = $x / 765,000
Plan II:
Number of shares = 515,000
Value of Debt = $9,250,000
Interest Rate = 12%
Interest Expense = 12% * $9,250,000
Interest Expense = $1,110,000
EPS = [EBIT - Interest Expense] / Number of shares
EPS = [$x - $1,110,000] / 515,000
EPS under Plan I = EPS under Plan II
$x / 765,000 = [$x - $1,110,000] / 515,000
103*$x = 153*$x - $169,830,000
$169,830,000 = 50*$x
$x = $3,396,600
So, Breakeven EBIT is $3,396,600
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