Break-Even EBIT and Leverage Kolby Corp, is comparing two different capital structures. Plan I would result in
Question:
Break-Even EBIT and Leverage Kolby Corp, is comparing two different capital structures. Plan I would result in 1,500 shares of stock and $520,000 in debt. Plan II would result in 1,100 shares of stock and $30,000 in debt. The interest rate on the debt is 10 percent.
a. Ignoring taxes compare both of these plans to an all-equity plan assuming that EBIT will be $12,000. The all-equity plan would result in 2,300 shares of stock outstanding. Which of the three plans has the highest EPS the lowest?
b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? Is one higher than the other? Why?
c. Ignoring taxes, when will EPS be identical for Plans I and II?
d. Repeat part (a), (b), and (c) assuming that the corporate tax rate is 40 percent. Are the break-even levels of EBIT different from before? Why or why not?
Step by Step Answer:
a The income statement for each capitalization plan is Plan II has the highest EPS the allequity plan has the lowest EPS b The breakeven level of EBIT ...View the full answer
Fundamentals of Corporate Finance
ISBN: 978-0077861629
8th Edition
Authors: Stephen A. Ross, Randolph W. Westerfield, Bradford D.Jordan
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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