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Calculate EBIT and EPS at breakeven point

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Question - Moses Company has a total asset of 400,000 of which 30% is debt with 12% interest and 70% is equity. This is the current capital structure and Moses earns EBIT of br. 40,000. However Moses panned to get involved in investment of $ 100,000 that would increase his current income from $ 40,000 to $ 60,000. To mobilize $ 100,000 required for invest assume the following two options are available

A. Issuing shares of 1000 each at $100.

B. Selling bond costing $ 100,000 that bears interest rate of 12.5%.

Given the above data and assuming that there is no preferred stock in capital structure.

A. Determine optimal capital structure.

B. Calculate degree of financial leverage taken into account 50% tax rate.

C. Calculate EBIT and EPS at breakeven point.

D. Decide whether pan A or plan B is better.

Reference no: EM132609247

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