Rise Against Corporation is comparing two different capital structures: an all-e

Question

Rise Against 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 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $1.90 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes. a. If EBIT is $425,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16)) EPS Plan I Plan II b. If EBIT is $675,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16)) EPS Plan I Plan lI c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Break-even EBIT

Explanation / Answer

a)

Interest Expense = $1.90 million x 7% = $133000

b)

Interest Expense = $1.90 million x 7% = $133000

c)

Break even EBIT is the EBIT level at which the EPS under two alternatives will be same

EBIT / 185000 = (EBIT - $133000)/135000

EBIT = (EBIT - 133000) x (185000/135000)

EBIT = (EBIT - 133000) x 1.37

0.37EBIT = 133000 x 1.37

EBIT = 182210/0.37 = $492459

Checking:

PLAN I EBIT $ 425,000 Less: Interest expense EBT $ 425,000 Less: tax $             -   EAT (earning after tax) $ 425,000 Number of shares outstanding 185000 EPS $         2.30

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