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7 September, 14:01

Galaxy Products 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 112,000 shares of stock outstanding. Under Plan II, there would be 75,000 shares of stock outstanding and $600,000 in debt. The interest rate on the debt is 6.7 percent and there are no taxes. What is the break-even EBIT?

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  1. 7 September, 16:05
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    Answer explained below

    Explanation:

    Earnings per share (EPS) under Plan 1 = EBIT / Total no. of shares = EBIT / 112000

    Earnings per share (EPS) under Plan 2 = (EBIT - Interest expense) / 75000

    Interest expense = 600000 * 6.7% = 40200

    Earnings per share under Plan 2 = (EBIT - 40200) / 75000

    For calculating Break even EBIT, we have to set the equations for EPS under both the Plans equal:

    EBIT / 112000 = (EBIT - 40200) / 75000

    It gives, 75000 EBIT = 112000 (EBIT - 40200)

    it gives, EBIT = 4502400000 / 37000

    So, EBIT = $121686
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Home » Business » Galaxy Products 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 112,000 shares of stock outstanding.
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