DAR Corporation is comparing two different capital structures: an all-equity pla
ID: 2616788 • Letter: D
Question
DAR 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 205,000 shares of stock outstanding. Under Plan II, there would be 155,000 shares of stock outstanding and $2.3 million in debt outstanding. The interest rate on the debt is 6 percent, and there are no taxes. a. If EBIT is $250,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) EPS Plan I $ Plan II $ b. If EBIT is $500,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) EPS Plan I $ Plan II $ 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.) Break-even EBIT $
Explanation / Answer
a
b
What is the break-even EBIT?
EBIT/205000=(EBIT-2300000*6%)/155000
break-even EBIT=565800
Plan 1 No of Share Outstanding 205000 EBIT 250000 EPS =250000/205000 1.22 Plan 2 No of Share Outstanding 155000 EBIT 250000 Less Interest 2300000*6% 138,000.00 Profit After Interest 112000 EPS=112000/155000 0.72Related Questions
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