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Calculating EPS at different levels of EBIT

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Rise Against Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 195,000 shares of stock outstanding. Under Plan II, there would be 145,000 shares of stock outstanding and $2.10 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

1. If EBIT (earnings before interest and taxes) is $550,000, what is the EPS (earnings per share) for each plan?

2. If EBIT is $800,000, what is the EPS for each plan?

3. What is the break-even EBIT?

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Solution Summary

Solution depicts the steps to calculate EPS at different levels of EBIT. It also determines the break-even level of EBIT.

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Finance question: For Morton Industries, calculate EBIT-EPS indifference point

Morton Industries is considering opening a new subsidiary in Boston, to be operated as a separate company. The company's financial analysts expect the new facility's average EBIT level to be $6 million per year. At this time, the company is considering the following two financing plans (use a 40 percent marginal tax rate in your analysis):

Plan 1 (Equity Financing). Under this plan, $2 million common shares will be sold at $10 each.

Plan 2 (Debt equity financing). Under this plan, $10 million of 12 percent long-term debt and 1 million common shares at $10 each will be sold.

a. Calculate the EBIT-EPS indifference point.

b. Calculate the expected EPS for both financing plans.

c. What factors should the company consider in deciding which financing plan to adopt?

d. Which plan do you recommend the company adopt?

e. Suppose Morton adopts Plan 2, and the Boston facility initially operates at an annual EBIT level of $6 million. What is the times interest earned ratio?

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