Break-Even EBIT
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Duval Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Duval would have 400,000 shares of stock outstanding. Under Plan II, there would be 200,000 shares of stock outstanding and $5 million in debt outstanding. The interest rate on the debt is 10%, and there are no taxes.
a. If EBIT is $600,000, which plan will result in the higher EPS?
b. If EBIT is $5.5 million, which plan will result in the higher EPS?
c. What is the break-even EBIT?
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Solution Summary
Duval Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Duval would have 400,000 shares of stock outstanding. Under Plan II, there would be 200,000 shares of stock outstanding and $5 million in debt outstanding. The interest rate on the debt is 10%, and there are no taxes.
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Plan a)400,000 Plan b )200000 + 5 Million
<br> EPS
<br> ...
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