Question

Kyle Corporation is comparing two different capital structures, an all-equity plan (Plan I), and a levered plan (Plan II). Under Plan I, Kyle would have 700,000 shares of stock outstanding. Under Plan II, there would by 450,000 shares of stock outstanding and $6 million in debt outstanding. The interest rate on the debt is 10%, and there are no taxes.
(a) If EBIT is $1.3 million, which plan will result in the higher EPS?
(b) If EBIT is $2.8 million, which plan will result in the higher EPS?
(c) What is the break-even EBIT?



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  • CreatedJuly 29, 2013
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