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 780,000 shares of stock outstanding. Under Plan II, there would be 530,000 shares of stock outstanding and $10.00 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

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

Assume that EBIT is $3.4 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., 32.16).)

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).)

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

Explanation / Answer

Requirement 1:

Plan 1

EPS = $2.9 million/780000 = 3.717948717 per share

Plan 2

Earnings after interest = $2.9 million - $1 million = $1.9 million

EPS = $1.9million/530000 = $3.58490566 per share

Requirement 2:

Plan 1

EPS = $3.4 million/780000 = $4.358974358 per share

Plan 2

Earnings after interest = $3.4 million - $1 million = $2.4 million

EPS = $2.4 million/530000 = $4.528301886

Requirement 3:

Break even EBIT

Let EBIT be x

Therefore, x/780000 = (x-1000000)/530000

530000x = 780000x - 780000000000

250000x = 780000000000

X = 780000000000/250000 = $3120000 i.e. $3.12 million

Therefore break even EBIT = $3.12 million

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

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