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Katlin Markets is debating between a levered and an unlevered capital structure. The all-equity capital structure would consist of 75,000 shares of stock. The debt and equity option would consist of 40,000 shares of stock plus $320,000 of debt with an interest rate of 6.25 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.a. $46,333.33b. $44,140.71c. $42,208.15d. $49,666.67e. $42,857.14

Respuesta :

Answer:

Explanation:

given data

all equity capital structure = 75,000 shares

debt and equity = 40,000 shares

debt = $320,000

interest rate = 6.25 percent

to find out

break even level of earnings before interest and taxes ( EBIT )

solution

first we get interest that is

interest = $320,000 × 6.25 %

interest = $20000

so now we can say that break even level of earnings before interest and taxes between these 2 is express as

[tex]\frac{EBIT}{75000} = \frac{EBIT-20000}{40000}[/tex]

solve it we get

EBIT = $42857.14

so correct option is e. $42,857.14

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