What amount of earnings before interest and tax (EBIT) will create the same leve
ID: 2805159 • Letter: W
Question
What amount of earnings before interest and tax (EBIT) will create the same level of earnings per share (EPS) for both Active and Passive? {2 ARS units if correct, 1 for any other answer} A. $10 B. $20 C. $30 D. $40 E. $50 (7) Application of calculating EBIT AGC has 2 million shares outstanding and $10 million of debt issued at a coupon rate of 10%. How much EBIT would AGC need to have in order to provide $3.00 of EPS to its shareholders? AGC pays tax at the rate of 20%. {2 ARS units if correct, 1 for any other answer} A. $9,000,000 B. $8,500,000 C. $8,000,000 D. $7,500,000 E. $7,000,000
Explanation / Answer
Answer Set EPS d = EPS m and Solve for EBIT
EBIT (1-0.30) /20 = (EBIT - 10) (1-0.30) / 10
10 EBIT = 20 EBIT - 200
- 10 EBIT = -200
EBIT = $ 20
Answer b) Set up the Income statement and work from botton to top
EBIT 8500,000
less Interest 1000,000(10000000 x 10/100)
Earning before tax 7500,000
Less Tax @ 20% 1500,000
Net Income 6000,000
No of Shares 2000,000
EPS $ 3
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