Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2708113 • 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 760,000 shares of stock outstanding. Under Plan II, there would be 510,000 shares of stock outstanding and $9.00 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
What is the break-even EBIT?
I think I did requirement 1 a and requirement 2 a correct. Could someone please solve the others for me?
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 760,000 shares of stock outstanding. Under Plan II, there would be 510,000 shares of stock outstanding and $9.00 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
Explanation / Answer
1.a. EPS = 2,500,000 / 760,000 = 3.29
1.b. EPS = (2,500,000-9,000,000*10%) / 510,000 = 3.14
2.a. EPS = 3,000,000 / 760,000 = 3.95
2.b. EPS = (3,000,000-9,000,000*10%) / 510,000 = 4.12
3. Breakeven EBIT = X
EPS under Plan I = X / 760,000
EPS under Plan II = (X-9,000,000*10%) / 510,000 = (X-900,000) / 510,000
Equating the 2, we get X / 760,000 = (X-900,000) / 510,000
Solving, we get X = breakeven EBIT = 2,736,000
Hope this helped ! Let me know in case of any queries.
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