Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2696048 • Letter: K
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 730,000 shares of stock outstanding. Under Plan II, there would be 480,000 shares of stock outstanding and $7.50 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
Assume thatEBIT is $1.9 million, compute the EPS for both Plan I andPlan II.
Assume thatEBIT is $3.4 million, compute the EPS for both Plan I andPlan II.
What is the break-even EBIT?
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 730,000 shares of stock outstanding. Under Plan II, there would be 480,000 shares of stock outstanding and $7.50 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
Assume thatEBIT is $1.9 million, compute the EPS for both Plan I andPlan II.
Assume thatEBIT is $3.4 million, compute the EPS for both Plan I andPlan II.
What is the break-even EBIT?
Explanation / Answer
EBIT = 1900000
Plan 1
EPS = 1900000/730000 = $2.60
Plan 2
Earning After Interest = 1900000 - 7500000*.08
EPS = 1300000/480000 = $2.7
EBIT = 3400000
Plan 1
EPS = 3400000/730000 = $4.66
Plan 2
Earning After Interest = 3400000 - 7500000*.08 = $2800000
EPS = 2800000/480000 = $5.83
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