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 790,000 shares of stock outstanding. Under Plan II, there would be 540,000 shares of stock outstanding and $10.50 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

Assume that EBIT is $3.1 million. Compute the EPS for both Plan I and Plan II.

Assume that EBIT is $3.6 million. Compute the EPS for both Plan I and Plan II.

What is the break-even EBIT?

Explanation / Answer

Answer: Assume that EBIT is $3.1 million. Compute the EPS for both Plan I and Plan II.

Assume that EBIT is $3.6 million. Compute the EPS for both Plan I and Plan II.

Break Even EBIT:

EBIT/790000=EBIT-840000/540000

540000 EBIT=790000EBIT-663600000000

-250000 EBIT=-663600000000

EBIT=$2654400

all-equity plan levered plan Particulars Plan I Plan II EBIT 3100000 3100000 Less: Interest 0 840000 10500000*8% EBT 3100000 2260000 Less: Taxes 0 0 EAT 3100000 2260000 No of share outstanding 790000 540000 EPS 3.924050633 4.185185185

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