Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2766461 • 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.
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
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).)
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).)
$
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
Explanation / Answer
Requirement 1:
EPS for Plan I :
Eps=Earnings avilable to share holders/no of shares=$2,600,000/765,000=$3.4
EPS for Plan II :
Interest=$9,250,000*12%=$1,110,000
EBIT=$2,600,000
EBT=$2,600,000-$1,110,000=$1,490,000
Eps=Earnings avilable to share holders/no of shares=$1,490,000/515,000=$2.89
Requirement 2:
EPS for Plan I :
Eps=Earnings avilable to share holders/no of shares=$3,100,000/765,000=$4.05
EPS for Plan II :
Interest=$9,250,000*12%=$1,110,000
EBIT=$3,100,000
EBT=$3,100,000-$1,110,000=$1,990,000
Eps=Earnings avilable to share holders/no of shares=$1,990,000/515,000=$3.86
Requirement 3:
EBIT/765,000=(EBIT-$1,110,000)515,000
515,000EBIT=765,000 EBIT-$1,110,000*765,000
765,000 EBIT-515,000 EBIT=$1,110,000*765,000
EBIT=$1,110,000*765,000/250,000=$3,396,600
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