Question

Kelso Electric is an all-equity firm with 49,250 shares of stock outstanding. The company is considering the issue of $335,000 in debt at an interest rate of 9 percent and using the proceeds to repurchase stock. Under the new capital structure, there would be 30,500 shares of stock outstanding. Ignore taxes. What is the break-even EBIT between the two plans?

Answer 1

$79,194

Step-by-step explanation:

The computation is shown below:

Break-even EBIT

(EBIT) ÷ (Number of shares) = (EBIT - Interest) ÷ Number of shares

(EBIT) ÷ (49,250) = (EBIT - $30,150) ÷ 30,500

If we cross multiplied each other, so

30500 × EBIT = 49,250 × EBIT - 1,484,887,500

After solving this,

The EBIT would be $79,194

The interest is come

= $335,000 × 9%

= $30,150