Question

@ @@@ @@ @ NAME: Monir Ahamed el XV. DAR Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan IT). Under Plan I, the company would have 200,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $3 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. What is the break-even EBIT? You must show work to get full credit. a. $915,000 b. $930,000 c. $945,000 d. $960,000 e. $975,000 What would happen to the break-even EBIT if the company borrowed another $3 million and repurchased another 50,000 shares? Why?

Answer 1

rate positively ..

answer a	Computation of EBIT
			Plan-1		Plan-2
i	Number of share outstanding		200,000		150,000
ii	Debt				$       3,000,000
iii=ii*8%	Interest = 8% on debt		0		$          240,000
	Break even ebit is the level where in EPS is same .
	For break even EBIT we will have same EPS under all equity and other plan . Therefore formula or equation will be
	Plan I
	EBIT/200000 = (EBIT-240000)/150000
	solving for EBIT we have -
	=1.5*EBIT = 2*EBIT -480000
	EBIT =	$          960,000
	Break Even EBIT =	$          960,000
	therefore answer = d.	$          960,000
answer a	Computation of revised break even point
			Plan-1		Plan-2
i	Number of share outstanding		150,000		100,000
ii	Debt		3000000		$       6,000,000
iii=ii*8%	Interest = 8% on debt		240000		$          480,000
	Break even ebit is the level where in EPS is same .
	For break even EBIT we will have same EPS under all equity and other plan . Therefore formula or equation will be
	Plan I
	(EBIT-240000)/150000 = (EBIT-480000)/100000
	solving for EBIT we have -
	=EBIT-240000 = 1.5(EBIT-480000)
	=EBIT-240000 = 1.5*EBIT-720000
	Break Even EBIT =	$          960,000
	Therefore we can see that break even EBIT has remained the same. This is because there is no tax impact.
	had there been tax impact break even EBIT could have been different.