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# 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 Preview

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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 ...

#### Solution Summary

Calculates break-even EBIT and EPS under an all-equity plan (Plan I) and a levered plan (Plan II).

\$2.19