Franklin Corporation is comparing two different capital structures, an all-equit

Question

Franklin Corporation is comparing two different capital structures, an all-equity plan (Plan 1) and a levered plan (Plan II). Under Plan I, the company would have 180,000 shares of stock outstanding. Under Plan I, there would be 130,000 shares of stock outstanding and $2.6 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes a. If EBIT is $575,000, 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 $825,000, 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 . What is the break-even EBIT? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Break-even EBIT

Explanation / Answer

a)

b)

c)At breakeven EPS under both alternative ar equal

EBIT /180000= [EBIT- 208000]/130000

130000 EBIT /180000 = EBIT -208000

.72222 EBIT = EBIT -208000

EBIT -.72222 EBIT = 208000

.27778 EBIT = 208000

EBIT = 208000/.27778

= 748794

Plan I Plan II EBIT 575000 575000 less:Interest 0 (208000)     [2600000*.08] EBT 575000 367000 less:Tax 0 0 EAT 575000 367000 number of shares 180000 130000 EPS   [EAT /Number of shares] 3.19 2.82

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