Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2762164 • 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 765,000 shares of stock outstanding. Under Plan II, there would be 515,000 shares of stock outstanding and $9.25 million in debt outstanding. The interest rate on the debt is 12 percent, and there are no taxes. Requirement 1: Assume that EBIT is $2.6 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 EPS
Plan I $
Plan II $
Requirement 2: Assume that EBIT is $3.1 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).)
EPS Plan I $
Plan II $
Requirement 3: 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).)
Break-even EBIT $
Explanation / Answer
Break Even EBIT = EPS in plan 1 = EPS in plan 2
= EBIT/765000 = (EBIT-Interest)/515000
= EBIT/765000 =( EBIT-1110000)/515000
= 515000EBIT= 765000EBIT-765000*515000
EBIT = 1575900
Particulars Plan 1 Plan 2 Earning before interest and tax 2600000 2600000 Less: Interest 0 1110000 Earning Before Tax 2600000 1490000 Less: tax 0 0 Earning after Tax 2600000 1490000 No. Of shares 765000 515000 Earning per share 3.398693 2.893204 Particulars Plan 1 Plan 2 Earning before interest and tax 3100000 3100000 Less: Interest 0 1110000 Earning Before Tax 3100000 1990000 Less: tax 0 0 Earning after Tax 3100000 1990000 No. Of shares 765000 515000 Earning per share 4.052288 3.864078Related Questions
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