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Galaxy Products is comparing two different capital structures, an all-equity plan (Plan 1) and a...

Question:

Galaxy Products is comparing two different capital structures, an all-equity plan (Plan 1) and a levered plan (Plan 2). Under Plan 1, the company would have 175,000 shares of stock outstanding. Under Plan 2, there would be 90,000 shares of stock outstanding and $1.4 million in debt. The interest rate on the debt is 7%, and there are no taxes. What's the break-even EBIT?

EPS

EPS or earnings per share is a ratio of earnings available to common shareholders to number of common shares, it indicates how much a shareholder deserves for every share held by him or her EPS is reported in income statement.

Answer and Explanation:

Break even EBIT is given by

EPS under plan 1 = EPS under plan 2

EBIT/Number of shares = (EBIT - Interest)/number of shares

EBIT/175000 = (EBIT - ($1400000 * 7%))/90000

EBIT/175 = (EBIT - $98000)/90

EBIT = (EBIT - $98000)175/90

EBIT = 1.9444EBIT - $190556

$190556 = 0.9444EBIT

EBIT = $201774


Learn more about this topic:

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How to Calculate Earnings Per Share: Definition & Formula

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 14
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