Olive Ltd produces various cooking oils. It is considering production of a new blend of vegetable oil, which will have earnings before interest and tax (EBIT) of $40,000 p.a. Olive can produce this new blend either under an all-equity plan (Plan A) or under a levered plan (Plan B). Under Plan A, Olive Ltd will issue 400,000 shares each priced at $1. Under Plan B, the company will issue 200,000 shares each priced at $1 and $200,000 in long term debt at 8% p.a. Assume there are no taxes.

a. Calculate earnings per share (EPS) under both plans. Which plan provides the highest earnings per share?

b. Calculate the break-even EBIT, that is, the EBIT that generates the same EPS (earnings per share) under both plans?

Answer rating: 100% (QA)

a 1 Plan A Number of shares issued 400000 Earnings before interest and tax EBIT 40000 Earnings per ... View the full answer