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    Capital Structure and Break Even EBIT

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    A company is comparing two different capital structures:

    An all equity plan (PLAN 1) and a levered plan (PLAN 2). Under plan 1 the company would have 200,000 shares of stock outstanding. Under plan 2 there would be 90,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 8% and there are not taxes.

    If EBIT is $150,000 which plan will result in the higher EPS?
    If EBIT is $300,000 which plan will resulting the higher EPS?
    What is the break even EBIT?

    © BrainMass Inc. brainmass.com October 9, 2019, 11:22 pm ad1c9bdddf
    https://brainmass.com/business/capital-structure-and-firm-value/capital-structure-break-even-ebit-254568

    Solution Preview

    Solution:

    If EBIT is $150,000 which plan will result in the higher EPS?

    Plan 1
    EBIT =150000
    Number of shares=200,000
    EPS=150000/200000=$0.75
    Plan 2
    EBIT =150000
    Number of shares=90,000
    Interest=1,500,000*8%=$120000
    Net ...

    Solution Summary

    The solution describes the steps to determine better capital structure at different levels of EBIT. It also calculates break even level of EBIT.

    $2.19