Yasmin Corporation is comparing two different capital structures, an all- equity
ID: 2628841 • 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 178,500 shares of stock outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and $1.785 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
Required:
(a)
If EBIT is $ 238,000, 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))
(b)
If EBIT is $ 833,000, 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))
(c)
The break-even EBIT is $ . (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32))
Explanation / Answer
a) Plan I's EPS:
EBIT 238000
Interest 0
Tax 0
Earning After Tax 238000
EPS = 238000/178500
EPS = 1.33
Plan II EPS
EBIT 238000
Interest 178500
Tax 0
Earning After Tax 59500
EPS = 59500/71400
EPS = 0.83
b.) Plan I's EPS:
EBIT 833000
Interest 0
Tax 0
Earning After Tax 833000
EPS = 833000/178500
EPS = 4.67
Plan II EPS
EBIT 833000
Interest 178500
Tax 0
Earning After Tax 654500
EPS = 654500/71400
EPS = 9.17
c) Interest paid is $178500
so, the break even EBIT is $178500 for plan II
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