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(Capl. Str.) A company has 5.72 million common shares outstanding and $58 million of debt with an interest rate of 5.9%. The company wants to raise another $46.4 million. It can do so by selling an additional 2.86 million shares of common stock (the equity plan) or by taking out a bank loan with an interest rate of 6.9% (the debt plan). The company has no preferred stock. The corporate tax rate is 22%. At what level of EBIT would the company have the same earnings per share (EPS) under either plan? Specify the answer in $ mln., to the nearest $0.01 mln., drop the $ symbol.
Computation of Level of EBIT the company would have the same earnings per share (EPS) under either plan:
Existing Debt amount = $58 million
Interest on Existing Debt amount = $58 million*5.9% = $3.422 million
Interest on new Debt = $46.4 million*6.9% = $3.2016 million
EPS of Equity Plan = EPS of Debt Plan
(EBIT-Interest)*(1-Tax rate)/No. of Shares = (EBIT-Interest)*(1-Tax rate)/No. of Shares
(EBIT- 3.422)*(1-0.22)/(5.72 + 2.86) = (EBIT- (3.422+3.2016))*(1-0.22)/5.72
(EBIT- 3.422)*(0.78)/8.58 = (EBIT- 6.6236)*(0.78)/5.72
0.78 EBIT-2.66916/8.58 = 0.78 EBIT-5.166408/5.72
5.72*(0.78 EBIT-2.66916) = 8.58*(0.78 EBIT-5.166408)
4.4616 EBIT - 15.2676 = 6.6924 EBIT - 44.32778
44.32778 - 15.2676 = 6.6924 EBIT - 4.4616 EBIT
29.06019 = 2.2308 EBIT
EBIT = 13.0268 or $13.03 million
So, the level of EBIT would the company have the same earnings per share (EPS) under either plan is $13.03 million