EBIT-EPS analysis
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Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II).
Under Plan I, Rolston would have 150,000 shares of stock outstanding. Under Plan II, there would be 60,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 10 perccent and there are no taxes.
a. If EBIT is $200,000, which plan will result in the higher EPS?
b. If EBIT is $700,000, which plan will result in the higher EPS?
c. What are the break-even EBIT?
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Solution Summary
Calculates break-even EBIT and EPS under an all-equity plan (Plan I) and a levered plan (Plan II).
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Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 150,000 shares of stock outstanding. Under Plan II, there would be 60,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 10 perccent and there are no taxes.
a. If EBIT is $200,000, which plan will result in the higher EPS?
Plan I (All equity)
EBIT $200,000
Interest on debt $0
EBT $200,000
-taxes @ 0% $0
EAT $200,000
No of shares outstanding= 150,000 ...
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