P16-4 Break-Even EBIT [LO1] James Corporation is comparing two different capital

Question

P16-4 Break-Even EBIT [LO1]

James 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 148,500 shares of stock outstanding. Under Plan II, there would be 59,400 shares of stock outstanding and $1.485 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

If EBIT is $223,000, Plan I's EPS is $ while Plan II's EPS is $. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

If EBIT is $693,000, Plan I's EPS is $ and Plan II's EPS is $. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

The break-even EBIT is $. (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32))

James 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 148,500 shares of stock outstanding. Under Plan II, there would be 59,400 shares of stock outstanding and $1.485 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

Explanation / Answer

a) Plan I EPS = 223000 / 148500 = 1.50

Plan II EPS = (223000 - 1485000*.10) / 59400 = 1.25

b) Plan I EPS = 693000 / 148500 = 4.67

Plan II EPS = (693000 - 1485000*.10) / 59400 = 9.17

c) Break even EBIT:

X / 148500 = (X - 1485000*.10) / 59400

X = 247500

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.