Refer to the scenario above. What level of EBIT would make this an attractive strategy?
A) $2,000
B) $1,800
C) $1,600
D) $1,400
Answer: B
Explanation: B) Set the two EPS's of SC Co., before and after debt, equal to each other and solve for EBIT. Thus,
all-equity EPS = EBIT/600 shares
leveraged EPS = (EBIT - $6000 × 10%)/400 shares
so EBIT/600 = (EBIT - $600)/400.
Solving, we get EBIT = $1,800.
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