Outhouse Bottled Water is comparing two different capital structures. Under plan A,Outhouse would have 100,000 shares of stock outstanding and no debt. Under plan B,there would be 75,000 shares outstanding and $1 million in debt outstanding. Theinterest rate on the debt is 10 percent and there are no taxes. What is the break-evenEBIT? In other words, what EBIT would produce the same EPS under either capitalstructure?

Outhouse Bottled Water is comparing two different capital structures. Under plan A,Outhouse would have 100,000 shares of stock outstanding and no debt. Under plan B,there would be 75,000 shares outstanding and $1 million in debt outstanding. Theinterest rate on the debt is 10 percent and there are no taxes. What is the break-evenEBIT? In other words, what EBIT would produce the same EPS under either capitalstructure?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 4P

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