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

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