Question

Becker Industries is considering an all equity capital structure against one with both debt and equity. The all equity capital structure would consist of 30,000 shares of stock. The debt and equity option would consist of 15,000 shares of stock plus $255,000 of debt with an interest rate of 8 percent. What is the break-even level of earnings before interest and taxes between these two options

Answer 1

The break-even level of earnings before interest and taxes is $47,200

Step-by-step explanation:

EBIT = Earnings before interest and taxes

EPS = Earnings per share

I = interest

n = number of equity shares

n1, n2 = number of equity shares outstanding after adopting financing plans 1 and 2

n1=30,000

n2= 15,000

Break-even EBIT level is the indifferent point where EPS under alternative financing plan is the same.

Mathematically, the break-even EBIT level is: EBIT/ n1 = (EBIT - I ) / n2

EBIT/30,000 =(EBIT -295,000 x 8%/ 15,000)

EBIT/2 = EBIT - 23,600

2*EBIT - 23,600 x 2 = EBIT

2EBIT - EBIT= 47,200

EBIT= $47,200