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Breakeven EBIT

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Sanborn Corp. is comparing two different capital structures. Plan I would result in 14,000 shares of stock and $95,000 in debt. Plan II would result in 8,000 shares of stock and $190,000 in debt. The interest rate on the debt is 9 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $80,000. The all-equity plan would result in 20,000 shares of stock outstanding. What is the EPS for each of these plans?

Plan I
Plan II
All Equity

b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?

Plan I and all-equity
Plan II and all-equity

c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?

d-1. Assuming that the corporate tax rate is 40%, what is the EPS of the firm?

Plan I
Plan II
All Equity

d-2. Assuming that the corporate tax rate is 40%, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?

Plan I and all-equity
Plan II and all-equity

d-3. Assuming that the corporate tax rate is 40%, at what level of EBIT will EPS be identical for Plans I & II?

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Solution Summary

The solution is presented in excel format and if you stop at any cell, you will be able to see the formula used. It shows the calculation of EPS under different capital structures as well as Breakeven EBIT.

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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