Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2738334 • 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 725,000 shares of stock outstanding. Under Plan II, there would be 475,000 shares of stock outstanding and $7.25 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes.
1. Assume EBIT is 1.8 million. compute the EPS for both Plan I and Plan II.
2. Assume EBIT is 3.3 million. Compute EPS for both plan I and plan II.
3. What is the break-even EBIT?
Explanation / Answer
1.
Calculate the EPS for both plan I and II:
Under plan I:
EPS = Net income / Number of shares outstanding
= $1.8 million / 725,000 shares
= $2.483
Therefore, EPS is $2.483
Under Plan II:
Details
Amount
EBIT
$ 1,800,000
Less: Interest on debt
($7,250,000 * 11%)
$ 797,500
EBAT
$ 1,002,500
EPS = Net income / Number of shares outstanding
= $1,002,500 / 475,000 shares
=$2.11
Therefore, EPS is $2.11.
2.
Calculate the EPS for both plan I and II:
Under plan I:
EPS = Net income / Number of shares outstanding
= $3.3 million / 725,000 shares
= $4.55
Therefore, EPS is $4.55
Under Plan II:
Details
Amount
EBIT
$ 3,300,000
Less: Interest on debt
($7,250,000 * 11%)
$ 797,500
EBAT
$ 2,502,500
EPS = Net income / Number of shares outstanding
= $2,502,500 / 475,000 shares
=$5.27
Therefore, EPS is $5.27.
Details
Amount
EBIT
$ 1,800,000
Less: Interest on debt
($7,250,000 * 11%)
$ 797,500
EBAT
$ 1,002,500
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