Rise Against Corporation is comparing two different capital structures: an all-e
ID: 2763597 • Letter: R
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 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.70 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.
If EBIT is $325,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))
If EBIT is $575,000, what is the EPS for each plan? (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, i.e. 1,234,567.)
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 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.70 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.
Explanation / Answer
Answer
Answer a
Figures in $
Particulars
All-equity plan
Levered plan
EBIT
a
325000
325000
Interest on debt
b
0
85000
(1700000*0.05)
Taxes
c
0
0
Earning after tax (a-b-c)
d
325000
240000
Shares outstanding
e
175000
125000
Earnings per share (d/e)
1.86
1.92
Answer b
Figures in $
Particulars
All-equity plan
Levered plan
EBIT
a
575000
575000
Interest on debt
b
0
85000
Taxes
c
0
0
Earning after tax (a-b-c)
d
575000
490000
Shares outstanding
e
175000
125000
Earnings per share (d/e)
3.29
3.92
Answer c
Figures in $
Particulars
All-equity plan
Levered plan
Breakeven EBIT
0
85000
(1700000*0.05)
Figures in $
Particulars
All-equity plan
Levered plan
EBIT
a
325000
325000
Interest on debt
b
0
85000
(1700000*0.05)
Taxes
c
0
0
Earning after tax (a-b-c)
d
325000
240000
Shares outstanding
e
175000
125000
Earnings per share (d/e)
1.86
1.92
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