DAR Corporation is comparing two different capital structures: an all-equity pla

Question

DAR 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 200,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $3 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

  

If EBIT is $675,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

    

If EBIT is $925,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

   

What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

  

DAR 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 200,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $3 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

Explanation / Answer

B

C

Breakeven EBIT occurs when EPSU = EPSL – where U stands for Unlevered Firm (No debt), and L stands for Levered firm (A firm that has debt in its capital structure)

EBIT/Number of Shares outstanding = EBIT - (Debt* Interest Rate)/Number of share Outstanding

EBIT/ 200000 = EBIT - (3000000x0.08)/150000

EBIT/200000 = EBIT - (240000)/150000

=960000

Beak-Even EBIT = $960,000

Plan I Plan II (ALL Equity) (Levered Plan) a) EBIT $675,000 EBIT $675,000 $675,000 Less; Interest $0 $240,000 Net Income $675,000 $435,000 Number of Shares Outstanding 200000 150000 EPS (net income / average outstanding common shares) $3.38 $2.90

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.