Ski and Board are two identical firms of identical size operating in identical m
ID: 2791218 • Letter: S
Question
Ski and Board are two identical firms of identical size operating in identical markets. Ski is unlevered with assets valued at $12000 and has 600 shares of stock outstanding. Board also has $12000 in assets and has $6000 in debt financed at an interest rate of 7.50% and has 300 shares of stock outstanding. Assume perfect capital markets. Calculate the level of EBIT that would make earnings per share the same for Ski and Board. $ Place your answer to the nearest dollar. If applicable, your answer should NOT include a comma
Explanation / Answer
EPS of levered firm = EPS of unlevered firm
=>
EBIT -interest/no of shares = EBIT - interest/no of shares
=>
EBIT - 6000*0.075/300 = EBIT-0/600
=>
EBIT - 450/300 = EBIT/600
=>
EBIT * 600 - 450 * 600 = EBIT *300
600 * EBIT - 300 * EBIT = 270000
300 * EBIT = 270000
EBIT = 270000/300
= 900
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