Question: Alpha Company is looking at two different capital structures, one an all-equity firm and the other a levered firm with $2.88 million of debt financing

Alpha Company is looking at two different capital structures, one an all-equity firm and the other a levered firm with

$2.88

million of debt financing at

12%

interest. The all-equity firm will have a value of

$4.8

million and

480,000

shares outstanding. The levered firm will have

192,000

shares outstanding.

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

b.Find the break-even EBIT for Alpha Company using EPS if the corporate tax rate is

20%.

c.What do you notice about these two break-even EBITs for Alpha Company?

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