Explore BrainMass

Explore BrainMass

    EBIT-EPS analysis

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com June 3, 2020, 10:23 pm ad1c9bdddf
    https://brainmass.com/business/accounting/ebit-eps-analysis-228718

    Solution Preview

    Please see attached file.

    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

    ADVERTISEMENT