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Duval Corporation: Calculating Higher EPS and Break-Even EBIT

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Break-Even EBIT.

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 600,000 shares of stock outstanding. Under Plan II, there would be 300,000 shares of stock outstanding and $10 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

a. If EBIT is $1.5 million, which plan will result in the higher EPS?

b. If EBIT is $11 million, which plan will result in the higher EPS?

c. What is the break-even EBIT?

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Solution Summary

This solution provides step by step calculations for EPS and EBIT.

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Formula for EPS = Net Income / Outstanding Shares

a. EPS under Plan I = 1,500,000 / 600,000
= $2.50 (Higher)

EPS under Plan II = (1,500,000 - 1,000,000) / 300,000
= 500,000 / 300,000
= $1.67

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