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Becker Industries is considering an all equity capital structure against one with both debt and equity. The all equity capital structure would consist of 36,000 shares of stock. The debt and equity option would consist of 18,000 shares of stock plus $310,000 of debt with an interest rate of 9 percent. What is the break-even level of earnings before interest and taxes between these two options

Respuesta :

Answer:

The right approach is "55800".

Explanation:

The given values is:

Rate of interest,

= 9%

= 0.09

The interest cost will be:

= [tex]310,000\times 0.09[/tex]

= [tex]27,900[/tex] ($)

Assumed return on capital employed are X. Break will also be whenever the dual capital requirements participate in almost the same earnings growth.

⇒ [tex]\frac{X}{36000} =\frac{X-27900}{18000}[/tex]

⇒     [tex]X=(X-27900)\times \frac{36000}{18000}[/tex]

⇒         [tex]=(X-27900)\times 2[/tex]

⇒         [tex]=2X-55800[/tex]

⇒    [tex]X=55800[/tex]  

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