Beruflich Dokumente
Kultur Dokumente
5. EBIT Breakeven (with and without taxes) – Alpha Company is looking at two
different capital structures, one an all-equity firm the second leveraged firm with
$2,000,000 of debt financing at 8% interest. The all-equity firm has $4,000,000 value
and 400,000 shares outstanding. The leveraged firm will have 200,000 shares
outstanding. Find the breakeven EBIT for Alpha company using EPS if
c. what do you notice about these two breakeven EBITs for Alpha Company?
Solution:
a. with no corporate taxes we have the following EPS for each structure
b. with a tax rate of 30% we have the following EPS for each structure
1
EBIT = $224,000 / 0.7= $320,000
c. The EBITs are the same because the tax rate does not impact the breakeven EBIT
13. M&M, World of Taxes – Air America in problem number 11 has lost it’s not for
profit status and the corporate tax rate is now 35%. If the value of Air America
was $5,000,000 as an all equity firm what is the value of Air America under a
50 – 50 debt equity ratio? Assume that the $5,000,000 is the after-tax value of
Solution:
originally an all equity firm with a value of $25,000,000. Fox now pays taxes at
40% rate. What is the value of Fox under the 1 to 3 debt to equity capital structure?
Solution: