Round hammer 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 180,000 shares of stock outstanding. under plan ii, there would be 130,000 shares of stock outstanding and $1.8 million in debt outstanding. the interest rate on the debt is 6 percent, and there are no taxes. a. if ebit is $225,000, what is the eps for each plan? b. if ebit is $475,000, what is the eps for each plan? c. what is the break-even ebit?

a. $1.25 and $0.9

b. $2.64 and $2.82

c.  $388,800

Explanation:

The formula to compute the earning per share is shown below:

Earning per share = (Net income - interest) ÷ (Number of shares)

a. For Plan A

EPS = ($225,000) ÷ (180,000 shares)

= $1.25

For Plan B

EPS = ($225,000 - $108,000) ÷ (130,000 shares)

= $0.9

The interest is computed below:

= $1.8 million × 6%

= $108,000

b. For Plan A

EPS = ($475,000) ÷ (180,000 shares)

= $2.64

For Plan B

EPS = ($475,000 - $108,000) ÷ (130,000 shares)

= $2.82

The interest is computed below:

= $1.8 million × 6%

= $108,000

c. Break-even EBIT

(EBIT) ÷ (Number of shares) = (EBIT - Interest) ÷ Number of shares  

(EBIT) ÷ (180,000) = (EBIT - $108,000) ÷ 130,000

After solving this,  

The EBIT would be $388,800

answer; risk transference;