Champion Telecommunications is restructuring. Currently Champion has no debt outstanding. After it restructures, debt will be $5 million. The rate offered to bondholders is 10 percent. Champion currently has 700,000 shares outstanding at a market price of $40/share. Earnings per share are expected to rise.
a. What is the minimum level of EBIT that Champion is expecting? Ignore the consequences of taxes.
b. Calculate the minimum level of EBIT that Champion Telecommunications' managers are expecting, if the interest rate on debt is 5 percent.
c. Assume that Champion Telecommunications had EBIT of $2 million; was the leverage beneficial in part a? In part b?