Alpha Company is looking at two different capital structures, one an all-equity firm and the other a levered firm with $4.6 million of debt financing at 14 % interest. The all-equity firm will have a value of $9.2 million and 460 comma 000 shares outstanding. The levered firm will have 230 comma 000 shares outstanding. a. Find the break-even EBIT for Alpha Company using EPS if there are no corporate taxes. a. What is the break-even EBIT for Alpha Company using EPS if there are no corporate taxes?

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Business

Messiah Prince

23 September, 04:23

Alpha Company is looking at two different capital structures, one an all-equity firm and the other a levered firm with $4.6 million of debt financing at 14 % interest. The all-equity firm will have a value of $9.2 million and 460 comma 000 shares outstanding. The levered firm will have 230 comma 000 shares outstanding. a. Find the break-even EBIT for Alpha Company using EPS if there are no corporate taxes. a. What is the break-even EBIT for Alpha Company using EPS if there are no corporate taxes?

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Erik · Answer 1

The break-even EBIT using EPS is $1,288,000.

Explanation:

the break-even EBIT using EPS is the EBIT that will brings EPS under two different capital structure equal.

Denot X is the EBIT.

* We have:

+ EPS in all-equity firm = X/460,000

+ EPS in levered firm = (X - interest rate) / 230,000 = (X - 4,600,000 x 14%) / 230,000 = (X - 644,000) / 230,000.

* We have the equation:

X/460,000 = (X-644,000) / 230,000 X/460,000 = 2.8 X = $1,288,000.

So, the break-even EBIT using EPS is $1,288,000.