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A firm is considering two different capital structures. The first option is an all-equity firm with 40,500 shares of stock. The levered option is 27,800 shares of stock plus some debt. Ignoring taxes, the break-even EBIT between these two options is $54,800. How much money is the firm considering borrowing if the interest rate is 7.6 percent

Respuesta :

Answer:

$226,107.89

Explanation:

As we know that

Break even EBIT is

EBIT ÷ Number of shares = (EBIT - Interest ) ÷ Number of shares

$54,800 ÷ 40,500 shares = ($54,800 - Interest) ÷ 27,800 shares

$54,800 ÷ 40,500 shares × 27,800 shares = ($54,800 - Interest)

$37,615.80 = $54,800 - Interest

So, interest is

= $54,800 - $37,615.80

= $17,184.20

Now the amount of borrowing is

= $17,184.20 ÷ 7.6%

= $226,107.89

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