Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2753929 • 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 745,000 shares of stock outstanding. Under Plan II, there would be 495,000 shares of stock outstanding and $8.25 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes.
What is the break-even EBIT?
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 745,000 shares of stock outstanding. Under Plan II, there would be 495,000 shares of stock outstanding and $8.25 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes.
Requirement 1: (a) Assume that EBIT is $2.2 million, compute the EPS for Plan I. $5.64 $4.97 $5.56 $2.61 $2.95 (b) Assume that EBIT is $2.2 million, compute the EPS for Plan II. $2.95 $5.64 $4.97 $2.61 $5.56 Requirement 2: (a) Assume that EBIT is $3.7 million, compute the EPS for Plan I. $5.64 $2.61 $3.29 $2.95 $4.97 (b) Assume that EBIT is $3.7 million, compute the EPS for Plan II. $3.29 $2.95 $2.61 $5.64 $4.97 Requirement 3:What is the break-even EBIT?
$2,269,210 $2,200,000 $385,092 $2,704,350 $2,792,500Explanation / Answer
Requirement 1 :
Requirement 2:
Requirement 3:
Calculation of break-even EBIT:
Let Break-even EBIT be X.
X-Interest/ 745,000 =X-Interest / 495,000
Then X / 745,000 =( X - 0.9075) / 495,000
or X is $ 2,704,350
Plan I Plan II EBIT $ 2.2 million $ 2.2 million Interest - 0.9075 million EBT $ 2.2 million $ 1.2925 million No. of shares 745,000 495,000 EPS 2.95 2.61Related Questions
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