Destin Corp. is comparing two different capital structures. Plan I would result
ID: 2650474 • Letter: D
Question
Destin Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent.
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $60,000. The all-equity plan would result in 14,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16))
In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?
Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?
Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Round your answers to 2 decimal places. (e.g., 32.16))
Assuming that the corporate tax rate is 40 percent, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?
Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II?
Destin Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent.
Explanation / Answer
Answer for point a:
Answer for point b:
For Plan I and all Equity break even EBIT would be the point where it is indifferent between both the plans
Let EBIT = X
EPS for plan I = EPS for all equity
X-$4,800/11,000 =X/14,000
14,000(X- $4,800) =11,000X
X-$4,800 =11,000/14,000 X
X - 0.7857X =$4,800
X =$4,800/0.2142
X =$22,408.97.
Breakeven EBIT for Plan II and All equity:
Let EBIT = X
EPS for plan I = EPS for all equity
X-$9,000/8,375 =X/14,000
14,000(X- $9,000) =8,375X
X-$9,000 =8,375/14,000 X
X - 0.5982X=$9,000
X =$9,000/0.4018
X =$22,399.20
Answer for subpoint c:
Let EBIT = X
X-$4,800/11,000 =X-$9,000/8,375
X-$4,800=11,000/8,375(X-$9,000)
X-$4,800 =1.3134(X-$9,000)
0.3134X = $11,820.60 -$4,800
X =$7020/0.3134
X =$22,401.40.
Answer for point d1:
Answerr for Subpoint d2:
Break even levels of EBIT for Plan I and All equity.
Let X be the EBIT
(X-$4,800)*0.60/11,000 =X/14,000
(0.60X - $2,880)/11,000 = 0.60X/14,000
(0.60X - $2,880)=0.60X *11,000/14,000
(0.60X - $2,880) =0.47142X
X =$2,880/0.12858
X=$22,398.51
For Plan II and All equity:
(X-$9.000)*0.60/8,375 =0.60X/14,000
(0.60X - $5,400)/8,375 = 0.60X/14,000
(0.60X - $5,400)=0.60X *8,375/14,000
(0.60X - $5,400) =0.35892X
X =$5,400/0.24108
X=$22,399.20
Answer for subpoint d3:
EPS Identical for plan I and Plan II is nothing but $22,399.
This is because Break even EBIT for Plan I and all equity is $22,399 and also break evn EBIT for Plan II and all equity is also $22,399, it implies that EBIT for Plan I and Plan II is $22,399.
Particulars Plan I Plan II All equity Number of shares 11000 8375 14000 Amount of debt $80,000.00 $150,000.00 $0.00 EBIT $60,000.00 $60,000.00 $60,000.00 Minus Interest $4,800.00 $9,000.00 $0.00 Earning available for equity share holders $55,200.00 $51,000.00 $60,000.00 EPS $5.02 $6.09 $4.29Related Questions
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