X 73.333333% BE w/25% ($500,000) ($250,000) ($250,000 x1.25) X (1 X) $300,000 $500,000X $250,000X $250,000 $312,500 X 75% 5. Alpha Company is looking at two Break-even EBIT (with and without taxes). different capital structures, one an all-equity firm and the other a leveraged firm with $5,000,000 of debt financing at 6% interest. The all-equity firm will have a value of $10,000,000 and 1,000,000 shares outstanding. The leveraged firm will have 500,000 shares outstanding. a. Find the EBIT for Alpha Company using EPS if there are no corporate taxes. b. Find the EBIT for Alpha Company using EPS if the corporate tax rate is 30%. c. What do you notice these two break-even EBITs for Alpha Company? ANSWER Interest expense a. $5,000,000(0.06) $300,000 BE (EBIT/1,000,000) (EBIT $300,000)/500,000 500,000 EBIT EBIT 00,000 $300,000,000,000 5,00,000 EBIT =$300,000,000,000 EBIT $600,000 Interest expense (1 b. $5,000,000(0.06) 0.3) $210,000 BE (EBIT/1,000,000) (EBIT $210,000)/500,000 500,000 EBIT EBIT 1,000,000 $210,000,000,000 5,00,000 EBIT =$210,000,000,000 EBIT $420,000
X 73.333333% BE w/25% X ($500,000) (1 X) ($250,000) $300,000 ($250,000 x1.25) $500,000X $250,000X $250,000 $312,500 X 75% 5. Break-even EBIT (with and without taxes). Alpha Company is looking at two different capital structures, one an all-equity firm and the other a leveraged firm with $5,000,000 of debt financing at 6% interest. The all-equity firm will have a value of $10,000,000 and 1,000,000 shares outstanding. The leveraged firm will have 500,000 shares outstanding. a. Find the EBIT for Alpha Company using EPS if there are no corporate taxes. b. Find the EBIT for Alpha Company using EPS if the corporate tax rate is 30%. c. What do you notice these two break-even EBITs for Alpha Company? ANSWER a. Interest expense $5,000,000(0.06) $300,000 BE (EBIT/1,000,000) (EBIT $300,000)/500,000 500,000 EBIT 00,000 EBIT $300,000,000,000 5,00,000 EBIT =$300,000,000,000 EBIT $600,000 b. Interest expense $5,000,000(0.06) (1 0.3) $210,000 BE (EBIT/1,000,000) (EBIT $210,000)/500,000 500,000 EBIT 1,000,000 EBIT $210,000,000,000 5,00,000 EBIT =$210,000,000,000 EBIT $420,000
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