Janess Corporation is an all equity ﬁrm with 500,000 shares outstanding. It is considering changing its capital structure to include debt. If it does, its shares will reduce to 375,000 and it will incur
Interest of $200,000. Given this information, calculate the indifference EBIT.

Question

Quizplus · Accepted Answer

The indifference EBIT is calculated where the EPS (Earnings Per Share) is the same for both capital structures. The formula for indifference EBIT is: EBIT - Interest = (EBIT - 0) * (Old Shares / New Shares). Solving for EBIT with the given numbers: EBIT - 200,000 = EBIT * (500,000 / 375,000). Solving this equation gives EBIT = $800,000.

Janess Corporation Is an All Equity ﬁRm with 500,000 Shares