Question

Room and Board is considering two capital structures that have a break-even EBIT of $31,800. The all-equity capital structure would have 18,200 shares outstanding. The leveraged capital structure would have 13,450 shares of stock and $98,000 of debt. What is the interest rate on the debt

Answer 1

The interest rate on the debt 8.46%

Step-by-step explanation:

In order to calculate the interest rate on the debt we would have to calculate first the EPS as follows:

EPS = $31,800 / 18,200 = 1.747252

Hence as it is a leverage structure Total Net income = EPS x Outstanding shares

Total Net income= 1.747252 * 13,450= $23,500.5494

To calculate the interest rate on the debt we would have to use the following formula:

interest rate on the debt= interest expense/debt

Interest expense=EBIT- Total Net income

Interest expense=$31,800-$23,500.5494=$8,299.45054

Therefore, interest rate on the debt=8,299.45054/$98,000

interest rate on the debt=8.46%