1) Breakeven EBIT

Round Hammer is comparing two different capital structure options, an all-equity option (Option 1) and a leveraged option (Option 2). Under Option 1, the company has 180,000 shares outstanding. Under option 2, the number of shares outstanding is 130,000 and the outstanding liability is $1.925,000. The interest rate on the debt is 8%, excluding tax considerations.

a) If EBIT is $400,000, which option has a higher EPS?

b) If EBIT is $600,000, which option has a higher EPS?

c) What is the breakeven EBIT?