Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2720284 • 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 705,000 shares of stock outstanding. Under Plan II, there would be 455,000 shares of stock outstanding and $6.25 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes.
Assume that EBIT is $1.4 million. Compute the EPS for both Plan I and Plan II. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32
Assume that EBIT is $2.9 million. Compute the EPS for both Plan I and Plan II. (Do not round intermediate calculations. 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).)
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 705,000 shares of stock outstanding. Under Plan II, there would be 455,000 shares of stock outstanding and $6.25 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes.
Explanation / Answer
1)
2)
3) For plan A:EPS = EBIT /number of shares
= EBIT / 705000
For plan B ,EPS = (EBIT -Interest/)/number of shares
= (EBIT - 687500)/455000
At break even ,EPS under both plan should be equal
EBIT / 705000 = (EBIT- 687500)/455000
455000*EBIT /705000 = EBIT -687500
.64539 EBIT =EBIT -687500
EBIT - .64539EBIT = 687500
.35461 EBIT = 687500
EBIT = 687500 /.35461
= $ 1,938,750 Approx .
Plan A B EBIT 1400000 1400000 Less:Interest - (687,500) [6250000*.11] EBT (a) 1,400,000 712,500 Number of shares(b) 705,000 455,000 EPS =A/B 1.99 1.57Related Questions
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