In today's market, the market value of each share of OGE's stock is $19. OGE is an all-equity company. Right now it has 7,000 shares of common stock outstanding.

OGE decided to take a loan in the amount of $60,000, and to do so it will sell the required number of corporate bonds. The annual cost of this corporate loan is 7 percent. What will OGE do with this borrowed money? It will buy back some of its common stock shares and therefore remove them from the market.

Calculate the earnings per share (EPS) at the break-even level of the company's earnings before interest and taxes (EBIT). (This break-even EBIT level makes OGE's stockholders indifferent between the company having debt and having none at all.)

Answer rating: 100% (QA)

To find the breakeven EBIT level we need to determine the point at which the earnings ... View the full answer