2.88 million of debt financing at 9% interest. The all-equity firm will have a value of $9.6 million and 480,000 shares outstanding. The levered firm will have 336,000 shares outstanding. a. Find the break-even EBIT for Alpha Company using EPS if there are no corporate taxes. b. Find the break-even EBIT for Alpha Company using EPS if the corporate tax rate is 40%. c. What do you notice about these two break-even EBITs for Alpha Company?
2.88 million of debt financing at 9% interest. The all-equity firm will have a value of $9.6 million and 480,000 shares outstanding. The levered firm will have 336,000 shares outstanding. a. Find the break-even EBIT for Alpha Company using EPS if there are no corporate taxes. b. Find the break-even EBIT for Alpha Company using EPS if the corporate tax rate is 40%. c. What do you notice about these two break-even EBITs for Alpha Company?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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 levered firm with
$2.88 million of debt financing at 9% interest. The all-equity firm will have a value of $9.6 million and 480,000 shares outstanding. The levered firm will have 336,000 shares outstanding.
a. Find the break-even EBIT for Alpha Company using EPS if there are no corporate taxes.
b. Find the break-even EBIT for Alpha Company using EPS if the corporate tax rate is 40%.
c. What do you notice about these two break-even EBITs for Alpha Company?
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