Explore BrainMass

Explore BrainMass

    Capital Structure and Break Even EBIT

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

    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

    Solution Preview


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

    Plan 1
    EBIT =150000
    Number of shares=200,000
    Plan 2
    EBIT =150000
    Number of shares=90,000
    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.