Kyle Corporation is comparing two different capital structures, an all-equity pl

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 770,000 shares of stock outstanding. Under Plan II, there would be 520,000 shares of stock outstanding and $9.50 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

Assume that EBIT is $2.7 million. Compute the EPS for both Plan I and Plan II.

Assume that EBIT is $3.2 million. Compute the EPS for both Plan I and Plan II.

What is the break-even EBIT?

I only need to find the break-even EBIT. Thank you!!!

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 770,000 shares of stock outstanding. Under Plan II, there would be 520,000 shares of stock outstanding and $9.50 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

Explanation / Answer

Answer:

Break-even EBIT is that level at which both plans shall have equal EPS

Lets say EBIT is X

So plan A EPS = X / 770000 Shares

And Plan B EPS = X (9500000*8%) /520000 = (X-760000 )/ 520000

Now keeping both EPS Equal :

X/ 770000 = (X-760000) / 520000

Now solving further for X :

We get X = 2340800

Hence the Break even EBIT is $2340800

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