Compute the break-even levels of ebit

Reference no: EM1353590

Break-Even EBIT and Leverage IBM Corp. is comparing two different capital structures. Plan I would result in 1,100 shares of stock and $16,500 in debt. Plan II would result in 900 shares of stock and $27,500 in debt. The interest rate on the debt is 10 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $10,000. The all-equity plan would result in 1,400 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest?

b. In part (a) what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? Is one higher than the other? Why?

c. Ignoring taxes, when will EPS be identical for Plans I and II?

d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 40 percent. Are the break-even levels of EBIT different from before? Why or why not?

Reference no: EM1353590

Questions Cloud

Various stakeholder perspectives : Discuss pros/cons of this practice from various stakeholder perspectives e.g. employees, co-workers, management, tenure vs. non-tenure employees, etc.

Elucidate the relationship between mc and avc : Elucidate the relationship between MC and AVC that causes MAC to intercept AVC at AVC lowest point with economics.

Thinking style differences between the us and japan : Compare and contrast the thinking style among U.S. culture, Japanese culture, and European culture. please use APA format and cite sources.

Clock controlled access and high-bandwidth internet access : Zippy Car, a medium-sized business wants to house the company-owned web servers in a facility that offers round-the-clock controlled access and high-bandwidth internet access.

Compute the break-even levels of ebit : Break Even EBIT and Leverage IBM Corporation is comparing two different capital structures. Plan I would result in 1,100 shares of stock and $16,500 in debt.

What will this price reduction necessarily lead : What can you say about the price elasticity of demand for DVD players. What will this price reduction necessarily lead to an increase in profits for DVD player manufacturers.

List of common data structures : Make a list of some of the common data structures provided by C#. You should have a minimum of 4 different data types.

Leaders role and responsibilities : Evaluate how a leader's role and responsibilities might change as a company becomes more diverse.

Determine the value without leverage : Milton Corporations expects free cash flow of $5 million each year. Milton'scorporate tax rate is 35 percent, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05 million,

User Account

All Pages