Let's break down the problem step by step: --- ### 1. **Identify the Breakeven EBIT Formula** The break-even EBIT is the EBIT at which the company would be indifferent between financing with all equity and financing with 20% debt and 80% equity. Since the company is currently all-equity financed, its Net Income is: \[ \text{Net Income}_{\text{equity only}} = (\text{EBIT} - 0) \times (1 - \text{Tax Rate}) \] With 20% debt: - Amount of debt = 20% of $350 million = **$70 million** - Interest on debt = $70 million × 8% = **$5.6 million** - The rest ($280 million) is equity. Net Income with debt: \[ \text{Net Income}_{\text{debt}} = (\text{EBIT} - \text{Interest}) \times (1 - \text{Tax Rate}) \] Set the two Net Incomes equal to find break-even EBIT: \[ \text{EBIT}_{\text{BE}} \times (1 - 0.21) = (\text{EBIT}_{\text{BE}} - 5.6\text{M}) \times (1 - 0.21) \] But this simplifies to EBIT = EBIT - Interest (which makes no sense), so let's use **Earnings Per Share (EPS)**, since the number of shares changes with equity. --- ### 2. **Determine Number of Shares Outstanding** - Market value of equity = $350 million (since equity = assets and all equity) - Price per share = $37 - Number of shares = $350,000,000 / $37 = **9,459,459 shares** --- ### 3. **Break-Even EBIT Calculation** #### **All Equity:** \[ \text{Net Income}_{\text{equity only}} = \text{EBIT} \times (1 - 0.21) \] \[ \text{EPS}_{\text{equity only}} = \frac{\text{Net Income}_{\text{equity only}}}{9,459,459} \] --- #### **With Debt:** - Debt issued = $70 million - Shares bought back = $70,000,000 / $37 = **1,891,892 shares** - New shares outstanding = 9,459,459 - 1,891,892 = **7,567,567 shares** - Interest = $5,600,000 \[ \text{Net Income}_{\text{debt}} = (\text{EBIT} - 5,600,000) \times (1 - 0.21) \] \[ \text{EPS}_{\text{debt}} = \frac{\text{Net Income}_{\text{debt}}}{7,567,567} \] --- ### 4. **Set EPSs Equal to Solve for Break-Even EBIT** \[ \frac{\text{EBIT} \times 0.79}{9,459,459} = \frac{(\text{EBIT} - 5,600,000) \times 0.79}{7,567,567} \] The 0.79 cancels out: \[ \frac{\text{EBIT}}{9,459,459} = \frac{\text{EBIT} - 5,600,000}{7,567,567} \] Cross-multiplied: \[ \text{EBIT} \times 7,567,567 = (\text{EBIT} - 5,600,000) \times 9,459,459 \] \[ 7,567,567 \text{EBIT} = 9,459,459 \text{EBIT} - 9,459,459 \times 5,600,000 \] \[ 9,459,459 \text{EBIT} - 7,567,567 \text{EBIT} = 9,459,459 \times 5,600,000 \] \[ 1,891,892 \text{EBIT} = 52,973,370,400 \] \[ \text{EBIT}_{\text{BE}} = \frac{52,973,370,400}{1,891,892} = 28,000 \] Wait—this answer is too low. Let’s check the calculation: \[ 9,459,459 \times 5,600,000 = 52,973,370,400 \] \[ \frac{52,973,370,400}{1,891,892} = \$28,000 \] That can't be correct; let's check the units. #### 9,459,459 shares × $5,600,000 = $52,973,370,400 But the denominator is **shares**, so the units work out. So, \[ \text{EBIT}_{\text{BE}} = \frac{52,973,370,400}{1,891,892} = \$28,000 \] But this is clearly wrong, since EBITs given are in the millions. Let's check the math again: - 9,459,459 – 7,567,567 = 1,891,892 - 9,459,459 × $5,600,000 = $52,973,370,400 - $52,973,370,400 / 1,891,892 = $28,000 (which is too low) #### Let's try this using millions to avoid confusion: \[ \frac{\text{EBIT}}{9.459459} = \frac{\text{EBIT} - 5.6}{7.567567} \] \[ \text{EBIT} \times 7.567567 = (\text{EBIT} - 5.6) \times 9.459459 \] \[ 7.567567 \text{EBIT} = 9.459459 \text{EBIT} - 53.974970 \] \[ 9.459459 \text{EBIT} - 7.567567 \text{EBIT} = 53.974970 \] \[ 1.891892 \text{EBIT} = 53.974970 \] \[ \text{EBIT}_{\text{BE}} = \frac{53.974970}{1.891892} = 28.55 \text{ million} \] So, the correct **EBIT break-even level** is **$28,550,000** (rounded to the nearest dollar: **$28,550,000**). --- ### **Final Answer** \[ \boxed{28,550,000} \] **The break-even level of EBIT is $28,550,000.**