Rise Against Corporation is comparing two different capital structures: an all-e

Question

Rise Against 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 150,000 shares of stock outstanding. Under Plan II, there would be 100,000 shares of stock outstanding and $1.20 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes. a. If EBIT is $300,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16)) EPS Plan I $ Plan II $ b. If EBIT is $550,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16)) EPS Plan I $ Plan II $ c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.) Break-even EBIT $

Explanation / Answer

plan 1 plan 2 no of equity shares 150000 no of equity shares 100000 debt 0 debt 1200000 interest rate 5% answer of A EBIT 300000 EBIT 300000 interest 0 interest 60000 Earning after tax 300000 Earning after tax 240000 no of shares 150000 no of shares 100000 EPS 2 EPS 2.4 answer of B EBIT 550000 EBIT 550000 interest 0 interest 0.12 Earning after tax 550000 Earning after tax 549999.88 no of shares 150000 no of shares 100000 EPS 3.666667 EPS 5.4999988 answer to c EPS break even point of EBIT EPS = (EBIT - I) x (1.0 - TR) / Equity number of shares after implementing financing plan. 2.4 Break even EBIT 240000

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