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Clover Foods is considering two different capital structures
Clover Foods is considering two different capital structures. The first option consists of 12,000 shares of stock. The second option consists of 8,000 shares of stock plus $125,000 of debt at an interest rate of 8 percent. Ignore taxes. What is the break-even level of earnings before interest and taxes (EBIT) between these two options?
Expert Solution
Computation of the break even level of earnings before interest and taxes (EBIT):-
(EBIT - (Debt * Interest rate)) / Number of shares in 2nd option = EBIT / Number of shares in 1st option
( EBIT - ($125,000 * 8%)) / 8,000 = EBIT / 12,000
12,000 * (EBIT - ($125,000 * 8%)) = EBIT * 8,000
(12,000 * EBIT) - (12,000 * $10,000) = (8,000 * EBIT)
(12,000 * EBIT) - (8,000 * EBIT) = $120,000,000
4,000 * EBIT = $120,000,000
EBIT = $120,000,000 / 4,000
= $30,000
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