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 780,000 shares of stock outstanding. Under Plan II, there would be 530,000 shares of stock outstanding and $10.00 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

What is the break-even EBIT? (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

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 780,000 shares of stock outstanding. Under Plan II, there would be 530,000 shares of stock outstanding and $10.00 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

Explanation / Answer

(x-10,000*.10)/530= x/780 (amounts in thousands)

250 x= 780,000

x= 3,120

So break even EBIT is 3,120,000

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