Final answer:
The break-even EBIT for Missy and Co., after issuing $78,000 worth of debt at a 6% interest rate to repurchase shares, is the annual interest expense of $4,680. This figure represents the level of operating income where the firm neither earns profit nor incurs loss.The correct answer is A. $4,680.
Step-by-step explanation:
The question asks for the calculation of the break-even EBIT, which stands for Earnings Before Interest and Taxes. This represents the level of operating income needed to cover all operating expenses, including interest expense, without generating either profit or loss.
To determine the break-even EBIT, we follow these steps: First, we find the number of shares that will be repurchased with the new debt issued by using the formula number of shares repurchased = amount of debt issued / market price per share. In this case, Missy and Co. will issue $78,000 worth of debt to repurchase shares at $37 per share, resulting in 2108 shares repurchased (rounded down).
Next, we calculate the annual interest expense by multiplying the amount of debt issued by the interest rate, which is $78,000 * 6% = $4,680. Since the firm has no earnings or losses before considering interest, the break-even EBIT is equal to the annual interest expense. Therefore, the correct answer is A. $4,680.