163 Benefits of borrowing.

Wilson Motors is looking to expand its operations by adding a second manufacturing location. If it issuccessful, the company will make $420,000. If itfails, the company will lose

$280,000. Wilson Motors is trying to decide whether it should borrow the

$280,000given the current bank loan rate of16%.

Should Wilson Motors borrow the money if

(Round to the nearest dollar. Enter a negative number for aloss.)

a. the probability of success is92%?

b. the probability of success is84%?

c. the probability of success is68%?

164 Break-even EBIT(with and without taxes).

Alpha Company is looking at two different capitalstructures, one anall-equity firm and the other a levered firm with $5.04million of debt financing at7% interest. Theall-equity firm will have a value of $8.4million and420,000shares outstanding. The levered firm will have168,000shares outstanding.

a. Find thebreak-even EBIT for Alpha Company using EPS if there are no corporate taxes.

b. Find thebreak-even EBIT for Alpha Company using EPS if the corporate tax rate is40%.

c. What do you notice about these twobreak-even EBITs for AlphaCompany?