Sunban Corp. is comparing two different capital structures. Plan A would result

Question

Sunban Corp. is comparing two different capital structures. Plan A would result in 1,210 shares of stock and $18,150 in debt. Plan B would result in 990 shares of stock and $30,250 in debt. The interest rate on the debt is 11 percent.

(a)Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $11,000. The all-equity plan would result in 1,540 shares of stock outstanding. Plan A has an EPS of $7.44 Plan B has an EPS of $7.75, and All-Equity Plan has an EPS of $7.14.

(b) In part (a) the break-even levels of EBIT for Plans A and B are $9317 and $9317, respectively, as compared to that for an all-equity plan. (round to 2 decimals)

(c). Ignoring tasex, EPS will be identical for Plans A and B when their EBITs are each $9317. (Round to nearest whole dollar)

(d) Repeat parts (a), (b) and (c) assuming that the corporate tax rate is 39 percent.

(i) EPSs for Plans A, B, and all-equity are $ _____, $ _____, and $ _____, respectively. (round to 2 decimal places)

(ii) Break-even EBITs for Plans A and B compared to an all-equity plan are $ _____ and $ _____, respectively (round to nearest whole dollars).

(iii) Break-even EBIT for Plan A versus Plan B: $ _____. (round to nearest whole dollar)

Explanation / Answer

EPS of plan A = 11000 - 1996.5 * (1-0.39)- 11000 * 0.39 /1210 = 4.54

EPS of plan B = 11000 - 3327.5* (1-0.39) - 11000 * 0.39 /990 = 4.73

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