Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

i need to understand how to get the $360000. i understand how to get to the step before that but could you show me how

i need to understand how to get the $360000. i understand how to get to the step before that but could you show me how that factors into $360000? i dont understand what i need to do with the 4/3 and the 90000 to get $360000 image text in transcribed
The MPD Corporation has decided in favor of a capital restructuring. Currently, MPD uses no debt financing. Following the restructuring, debt will be $1 million. The interest rate on the debt will be 9 percent. MPD currently has 200,000 shares outstanding, and the price per share is $20. If the restructuring is expected to increase EPS, what is the minimum level for EBIT that MPD's management must be expecting? Ignore taxes in answering. To answer, we calculate the break-even EBIT. At any EBIT above this, the increased financial leverage will increase EPS, so this will tell us the minimum level for EBIT. Under the old capital structure, EPS is EBIT/200,000. Under the new capital structure, the interest expense will be $1 million .09=$90,000. Furthermore, with the $1 million proceeds, MPD will repurchase $1 million $20=50,000 shares of stock, leaving 150,000 shares outstanding. EPS will be (EBIT - \$90,000)/150,000. Now that we know how to calculate EPS under both scenarios, we set them equal to each other and solve for the break-even EBIT: EBIT/200,000EBIT=(EBIT$90,000)/150,000=4/3(EBIT$90,000)=$360,000

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Climate Finance Theory And Practice

Authors: Anil Markandya, Ibon Galarraga, Dirk Rübbelke

1st Edition

9814641804, 978-9814641807

More Books

Students also viewed these Finance questions

Question

Show that x2 + 4x + 17 is O(x3) but that x3 is not O(x2 + 4x + 17).

Answered: 1 week ago

Question

=+2. Describe phishing.

Answered: 1 week ago

Question

Draft a proposal for a risk assessment exercise.

Answered: 1 week ago