Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure

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Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure would consist of 40,000 shares of stock. The debt and equity option would consist of 25,000 shares of stock plus $280,000 of debt with an interest rate of 7 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.    A.  $42,208 B.  $44,141 C.  $46,333 D.  $49,667 E.  $52,267 EBIT/40,000 = [EBIT - ($280,000 × 0.07)]/25,000; EBIT = $52,267

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Holly's is currently an all equity firm that has 9,000 shares of stock outstanding at a market price of $45 a share. The firm has decided to leverage its operations by issuing $120,000 of debt at an interest rate of 9.5 percent. This new debt will be used to repurchase shares of the outstanding stock. The restructuring is expected to increase the earnings per share. What is the minimum level of earnings before interest and taxes that the firm is expecting? Ignore taxes.    A.  $38,475 B.  $40,516 C.  $42,000 D.  $44,141 E.  $45,020 EBIT/9,000 = [EBIT - ($120,000 × 0.095)]/[9,000 - ($120,000/$45)]; EBIT = $38,475