Yasmin Corporation is comparing two different capital structures, an all- equity
ID: 2621363 • Letter: Y
Question
Yasmin Corporation is comparing two different capital structures, an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the Yasmin would have 163,500 shares of stock outstanding. Under Plan II, there would be 65,400 shares of stock outstanding and $1.635 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
If EBIT is $ 218,000, Plan I's EPS is $ while Plan II's EPS is $ . (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
If EBIT is $ 709,000, Plan I's EPS is $ and Plan II's EPS is $ . (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
The break-even EBIT is $ . (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32))
Yasmin Corporation is comparing two different capital structures, an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the Yasmin would have 163,500 shares of stock outstanding. Under Plan II, there would be 65,400 shares of stock outstanding and $1.635 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
Explanation / Answer
EPS = (EBIT - Interest)*(1- tax rate)/ no. of shares
as no taxes are there
so
EPS = (EBIT - Interest)/Shares
A)
Plan I :
EPS = 218,000 / 163,500 = $ 1.333
Plan II:
EPS = (218,000 - 1.635*10^6*0.1)/65,400 = $ 0.833
B)
Plan I :
EPS = 709,000 / 163,500 = $ 4.3364
Plan II:
EPS = (709,000 - 1.635*10^6*0.1)/65,400 = $ 8.341
C)
EPS 1 = EPS 2
EBIT/163,500 = (EBIT - 1.635*10^6*0.1)/65,400
65,400 *EBIT = 163,500*EBIT - 163,500*163,500
EBIT = 163,500^2 / (163,500 - 65,400) = $ 272,500 ..........(ans)
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