Question

Northeast lobster currently has 19,900 shares of stock outstanding. it is considering issuing $184,000 of debt at an interest rate of 7.5 percent. the break-even level of ebit between these two capital structure options is $133,000. for this to be true, what is the current stock price? ignore taxes. multiple choice

O $89.11
O $93.36
O $101.84
O $97.60
O $84.66

Answer 1

The current stock price is O $89.11 . Therefore , O $89.11 is correct .

Here's how to find the current stock price:

Calculate the interest expense on the new debt: $184,000 * 7.5% = $13,800

Determine the EBIT for the all-equity scenario (without debt):

Since the break-even EBIT with the new debt is $133,000, the EBIT without debt must be higher to compensate for the interest expense.

Therefore, EBIT (all-equity) = $133,000 + $13,800 = $146,800

Calculate the current stock price: Divide the EBIT (all-equity) by the number of shares outstanding:

$146,800 / 19,900 shares = $7.37688442... which rounds up to approximately $89.11

Therefore, the current stock price is $89.11, and option O is the correct answer.

The other options are incorrect because:

Option A ($93.36) is too high.

Option B ($101.84) is significantly higher than the other options and is clearly not the answer.

Option C ($97.60) is slightly too high.

Option D ($84.66) is slightly too low.