Rolston Corporation is comparing two different capital structures, an all-equity

Question

Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 160,000 shares of stock outstanding. Under Plan II, there would be 110,000 shares of stock outstanding and $1.40 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes. a. If EBIT is $400,000, what is the EPS for each plan? b. If EBIT is $650,000, what is the EPS for each plan? c.What is the break-even EBIT?

Explanation / Answer

a.

b.

Plan I Plan II EBIT 400000 400000 Int - 98000 EBT 400000 302000 EAT 400000 302000 Common Shares 160000 160000 EPS $2.5 $1.89

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