Calculate an EBIT break-even between a debt firm (DF) and an all-equit

Calculate an EBIT break-even between a debt firm (DF) and an all-equity firm (EF) based on the following information: DF interest = $60,000, DF number common shares = 5,000, EF number of common shares = 12,000, and tax rate = 40 percent.

A) EBIT = $234,547 and EPS = 10.35
B) EBIT = $146,312 and EPS = $7.02
C) EBIT = $102,857 and EPS = $5.14
D) EBIT = $91,217 and EPS = $4.18

ANSWER

C
Explanation: C) (EBIT-0)(1-t)/n = (EBIT – I)(1-t)/n = (EBIT-0)(.60)/12,000 = (EBIT – $60,000)(.60)/5,000
EBIT = $102,857 and EPS = $5.14.