Rise Against Corporation is comparing two different capital structures: an all-e

Question

Rise Against 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 195,000 shares of stock outstanding. Under Plan II, there would be 145,000 shares of stock outstanding and $2.90 million in debt outstanding. The interest rate on the debt is 7 percent, and there are no taxes. a. If EBIT is $475,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16)) EPS Plan I $ Plan II $ b. If EBIT is $725,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16)) EPS Plan I $ Plan II $ c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Break-even EBIT $ check my workView Hint #1referencesebook & resources

Explanation / Answer

a)

Plan 1:

EPS = (EBIT)/No. of shares = 475,000/195,000 = $ 2.44

Plan 2:

EPS = (EBIT- Interest)/No. of shares = (475,000 - 0.07*2,900,000)/145,000 = $1.88

b)

Plan 1:

EPS = (EBIT)/No. of shares = 725,000/195,000 = $ 3.72

Plan 2:

EPS = (EBIT- Interest)/No. of shares = (725,000 - 0.07*2,900,000)/145,000 = $ 3.6

c)

Plan 1:

EPS1 = (EBIT)/No. of shares   

Plan 2:

EPS2 = (EBIT- Interest)/No. of shares

so at breakeven

EPS1 = EPS 2

EBIT/195,000 = (EBIT - 0.07*2,900,000)/145,000

145,000EBIT = 195,000*EBIT - 0.07*2,900,000*195,000

EBIT = 0.07*2,900,000*195,000 /(195,000-145,000) = $791,700

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