Use the following information to answer questions 1-3 Genisys Corp is comparing
ID: 2757275 • Letter: U
Question
Use the following information to answer questions 1-3
Genisys Corp 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 $2.1 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
If Earnings Before Interest and Taxes (EBIT) is $800,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Earnings per share (EPS) are:
1. Under Plan I = $______
2. Under Plan II = $_____
3.
What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Break-even EBIT = $______
Please show the works
Explanation / Answer
Answer 1 Plan I Plan II No. of Shares 195000 145000 Debt 0 2100000 EBIT 800000 800000 Interest @8% 0 168000 Taxes 0 0 Net Income 800000 632000 EPS 4.10 4.36 EPS under Plan I 4.10 EPS under Plan II 4.36 Answer 2 Breakeven EBIT in Plan I '= 'EPS'* common no. of share outstanding '=4.102564*195000 '=800000 Breakeven EBIT in Plan II '= 'EPS'* common no. of share outstanding + Debt interest '=4.35862*145000+168000 '=800000