P16-4 Break-Even EBIT [LO1] James Corporation is comparing two different capital
ID: 2708157 • Letter: P
Question
P16-4 Break-Even EBIT [LO1]
James 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 178,500 shares of stock outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and $1.785 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
If EBIT is $208,000, Plan I's EPS is $ while Plan II's EPS is $. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
If EBIT is $803,000, Plan I's EPS is $ and Plan II's EPS is $. (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
The break-even EBIT is $. (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32))
James 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 178,500 shares of stock outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and $1.785 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
Explanation / Answer
Under Plan I, the company would have 178,500 shares of stock outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and $1.785 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
Let break-even EBIT= EBIT
For break-even EBIT, EPS of Plan I= EPS of Plan II
(EBIT-0)/178,500 = (EBIT-1785000*10%)/71,400
EBIT = 2.5*(EBIT-178500)
break-even EBIT =$297,500
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