Chick 'N Fish is considering two different capital structures.The first option consists of 25,000 shares of stock.The second option consists of 15,000 shares of stock plus $150,000 of debt at an interest rate of 7.5 percent.Ignore taxes.What is the break-even level of earnings before interest and taxes (EBIT)between these two options?
A)$2,813
B)$3,134
C)$16,410
D)$28,125
E)$31,338

Question

Quizplus · Accepted Answer

The break-even EBIT is where the earnings per share (EPS) are the same for both capital structures. For the first option, EPS = EBIT / 25,000. For the second option, EPS = (EBIT - $150,000 * 0.075) / 15,000. Setting these equal and solving for EBIT gives the break-even point.

Chick 'N Fish Is Considering Two Different Capital Structures