Becker Industries is considering an all equity capital structure against one wit

Question

Becker Industries is considering an all equity capital structure against one with both debt and equity. The all equity capital structure would consist of 30,000 shares of stock. The debt and equity option would consist of 15,000 shares of stock plus $255,000 of debt with an interest rate of 8 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.

Becker Industries is considering an all equity capital structure against one with both debt and equity. The all equity capital structure would consist of 30,000 shares of stock. The debt and equity option would consist of 15,000 shares of stock plus $255,000 of debt with an interest rate of 8 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.

Explanation / Answer

OPTION -1 ; 30000 SHARES

LET EBIT BE X

EBIT = X

LESS: INTEREST = 0

PBT/PAT = X

EPS = X/30000

OPTION 2; 15000 SHARES & DEST 255000 @ 8%

EBIT = X

LESS; INTEREST [255000*8%] =(20400)

PAT/PBT = X-20400

EPS = (X-20400)/15000

FOR BREAKEVEN POINT,

X/30000 = (X-20400)/15000

15000X = 30000X

OPTION -1 ; 30000 SHARES

LET EBIT BE X

EBIT = X

LESS: INTEREST = 0

PBT/PAT = X

EPS = X/30000

OPTION 2; 15000 SHARES & DEST 255000 @ 8%

EBIT = X

LESS; INTEREST [255000*8%] =(20400)

PAT/PBT = X-20400

EPS = (X-20400)/15000

FOR BREAKEVEN POINT,

X/30000 = (X-20400)/15000

15000X = 30000X

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