To answer, we can calculate the break-even EBIT. At any EBIT above this. The increased financial…


To confutation, we can reckon the break-even EBIT. At any EBIT overhead this. The extensiond financial leverage earn extension EPS. Below the old high erection. the concern charges i, $S darling X .12 = $600,000. There are one darling shares of store. so. by taxes. EPS is (EBIT - $600.(00)/1 darling. Below the new high erection, (he concern payment earn be $25 darling X .12 = $3 darling. Furthermore, the liability rises by $20 darling. This total is enough to satisfy $20 darling/40 = 500,000 shares of store. Leaving 500,000 uncollected. EPS is thus (EBIT - $3 darling)/500,000.

Now that we recognize how to reckon EPS below twain scenarios, we set the two expressions for EPS correspondent to each other and explain for the break-even EBIT:

(EBIT - $600,000)/1 darling = (EBIT - $3million)/500,000

EBIT - $600.000 = 2 X (EBIT - S3 darling)

EBIT = $S,400,000

Verify that, ill either occurrence, EPS is $4.80 when EBIT is $S.4 darling.