c. Repeat parts (a) and (b) of this problem assuming the firm has a tax rate of
ID: 2657485 • Letter: C
Question
c. Repeat parts (a) and (b) of this problem assuming the firm has a tax rate of 35 percent. . Break-Even EBIT [LO1] DAR 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 195,000 shares of stock outstanding. Under Plan II, there would be 140,000 shares of stock outstanding and $1,787,500 in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. a. If EBIT is $400,000, which plan will result in the higher EPS? b. If EBIT is $600,000, which plan will result in the higher EPS? c. What is the break-even EBIT? 5. M&M; and Stock Value [LO1] In Problem 4, use M&M; Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?Explanation / Answer
a)If EBIT is 400000 , Plan 1 will result in higher EPS calculation Plan1 EPS 2.05 400000/195000 Plan2 EPS 1.84 (400000-(1787500*8%))/140000 b)If EBIT is 600000 , Plan 2 will result in higher EPS Plan1 EPS 3.08 600000/195000 Plan2 EPS 3.26 (600000-(1787500*8%))/140000 c) For break even EBIT both EPS are the same EBIT/195000=EBIT-(1787500*8%)/140000 EBIT/195000=(EBIT-143000)/140000 EBIT = (EBIT-143000)1.392857 = 1.392857EBIT -1.392857*143000 = 1.392857EBIT -199178.6 EBIT = 507000.3 = 507000 rounded
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