Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2635016 • 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, Kyle would have 795,000 shares of stock outstanding. Under Plan II, there would be 545,000 shares of stock outstanding and $10.75 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes.
What is the break-even EBIT?
Kyle Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Kyle would have 795,000 shares of stock outstanding. Under Plan II, there would be 545,000 shares of stock outstanding and $10.75 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes.
Explanation / Answer
1a. Plan 1
EBIT $3,200,000
Less Interest 0
Net income $3,200,000
No of shares outstanding= 795,000
EPS = $3,200,000/795,000 = $4.03
b. Plan II
EBIT $3,200,000
Less Interest@7% $752,500
Net income $2,447,500
No of shares outstanding= 545,000
EPS = $2,447,500/545,000 = $4.49
2 a
Plan 1
EBIT $3,700,000
Less Interest 0
Net income $3,700,000
No of shares outstanding= 795,000
EPS = $3,700,000/795,000 = $4.65
b. Plan II
EBIT $3,700,000
Less Interest@7% $752,500
Net income $2,947,500
No of shares outstanding= 545,000
EPS = $2,947,500/545,000 = $5.41
3. Breakeven EBIT
EBIT/795,000 = (EBIT-$752,500)/545,000
0.68553 EBIT = EBIT-$752,500
EBIT = $2,392,950
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