Rise Against Corporation is comparing two different capital structures: an all-e

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 200,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $2.20 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.

1. If EBIT is $350,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

2. If EBIT is $600,000, what is the EPS for each plan? (Round your answers to 2 decimal places.(e.g., 32.16))

3. 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.)

Explanation / Answer

Requirement 1:

EPS for Plan I :

Eps=Earnings avilable to share holders/no of shares=$350,000/200,000=$1.75

EPS for Plan II :

Interest=$2,200,000*5%=$110,000

EBIT=$350,000

EBT=$350,000-$110,000=$240,000

Eps=Earnings avilable to share holders/no of shares=$240,000/150,000=$1.6

Requirement 2:

EPS for Plan I :

Eps=Earnings avilable to share holders/no of shares=$600,000/200,000=$3

EPS for Plan II :

Interest=$2,200,000*5%=$110,000

EBIT=$600,000

EBT=$600,000-$110,000=$490,000

Eps=Earnings avilable to share holders/no of shares=$490,000/150,000=$3.27

Requirement 3:

EBIT/200,000=(EBIT-$110,000)/150,000

150,000 EBIT=200,000 EBIT-$110,000*200,000

50,000 EBIT=$110,000*200,000

EBIT=$110,000*200,000/50,000=$440,000

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