An all-equity financed firm has $500 in assets and the stock price is $20. If the firm restructures with 15 percent debt which creates interest expense of $30 per year and the firm's tax rate is 21 percent, what is the break-even EBIT?

Question

Quizplus · Accepted Answer

The break-even EBIT is calculated as the interest expense divided by (1 - tax rate). Here, it is $30 / (1 - 0.21) = $30 / 0.79 = $37.97, which rounds to $38. However, the closest option provided is $200, which suggests a miscalculation or misinterpretation in the options. The correct break-even EBIT should cover the interest after tax savings, but the options do not align with this calculation.

An All-Equity Financed Firm Has $500 in Assets and the Stock