Question

hotel cortez is an all-equity firm that has 10,600 shares of stock outstanding at a market price of $33 per share. the firm's management has decided to issue $64,000 worth of debt and use the funds to repurchase shares of the outstanding stock. the interest rate on the debt will be 7 percent. what is the break-even ebit?

Answer 1

If hotel cortez is an all-equity firm that has 10,600 shares of stock outstanding at a market price of $33 per share.  The break-even ebit is:  $24,486.05.

How to find the break-even ebit?

First step is to calculate the share repurchased

Shares repurchased =$64,000 /$33 per share

Shares repurchased =1,939.39 shares

Second step is to calculate the shares outstanding

Shares outstanding = 10,600 shares - 1,939.39 shares

Shares outstanding = 8,660.61 shares

Now let find the break-even ebit

EBIT/10,600= [EBIT − $64,000(.07)]/ 8,660.61

EBIT/10,600 = [EBIT − $4,480]/ 8,660.61

EBIT/10,600 -8,660.61 = [10,600 ×$4,480]

EBIT/1,939.39 = $47,488,000

EBIT = $47,488,000 / 1,939.39

EBIT = $24,486.05

Therefore the break-even ebit is

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