DAR Corporation is comparing two different capital structures: an all-equity pla

Question

DAR 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 $1.7 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? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

    

If EBIT is $575,000, what is the EPS for each plan? (Do not round intermediate calculations and 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.)

  

DAR 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 $1.7 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.

Explanation / Answer

EPS when EBIT is 325000

Plan1=$1.857143

Plan2=$1.92

EPS when EBIT is $575000

Plan1=$3.285714

Plan2=$3.92

Break-even EBIT Here we have to compare both the equity and leverage capital structures to get indifference point of EBIT Formula would be Plan1 All equity EBIT(1-T) /N1 Plan2 Equity+Debt (EBIT-I)(1-T) /N2 (EBIT (1-0) /175000) = (EBIT-85000) (1-0) /125000 LETS ASSUME EBIT AS "X" 125000X = 175000X-(175000*85000) 50000X =(175000*85000) 14875000000 Break even EBIT $297500

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