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Break- Even Rolston Corporation is comparing two different capital structures,an all equity plan
(Plan 1) and a levered plan (Plan II0. Under Plan I, Rolston would have 265,000 shares of stock
outstanding. Under Plan II, there would be 185,000 share of stock outstanding and 2.8 million in
debt outstanding. The interest rate on the debt is 10 percent and there is no taxes
A. If EBIT is $750,000, which plan will result in higher EPS
B. If EBIT is 1,500,000, which plan will result in the higher EPS
C. What is the break-even EBIT
Solution
Part C
(EBIT - INterest)(1- tax rate)/N = (EBIT - INterest)(1- tax rate)/N
(EBIT-0)/265000 = (EBIT - 280000)/185000
Solving for EBIT = 927500 answer

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Break- Even Rolston Corporation is comparing two different capital str.docx

  • 1. Break- Even Rolston Corporation is comparing two different capital structures,an all equity plan (Plan 1) and a levered plan (Plan II0. Under Plan I, Rolston would have 265,000 shares of stock outstanding. Under Plan II, there would be 185,000 share of stock outstanding and 2.8 million in debt outstanding. The interest rate on the debt is 10 percent and there is no taxes A. If EBIT is $750,000, which plan will result in higher EPS B. If EBIT is 1,500,000, which plan will result in the higher EPS C. What is the break-even EBIT Solution Part C (EBIT - INterest)(1- tax rate)/N = (EBIT - INterest)(1- tax rate)/N (EBIT-0)/265000 = (EBIT - 280000)/185000 Solving for EBIT = 927500 answer