Break- Even Rolston Corporation is comparing two different capital structures,an

Question

Break- Even Rolston Corporation is comparing two different capital structures,an all equity plan (Plan 1) and a levered plan (Plan II0. Under Plan I, Rolston would have 265,000 shares of stock outstanding. Under Plan II, there would be 185,000 share of stock outstanding and 2.8 million in debt outstanding. The interest rate on the debt is 10 percent and there is no taxes

A. If EBIT is $750,000, which plan will result in higher EPS?

B. If EBIT is $1,500,000, which Plan will result in higher EPS

C. What is the break even EBIT? (Please show formula)

Explanation / Answer

Part C

(EBIT - INterest)(1- tax rate)/N = (EBIT - INterest)(1- tax rate)/N

(EBIT-0)/265000 = (EBIT - 280000)/185000

Solving for EBIT = 927500 answer

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects