Destin Corp. is comparing two different capital structures. Plan I would result

Question

Destin Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $100,000 in debt. Plan II would result in 8,700 shares of stock and $155,000 in debt. The interest rate on the debt is 5 percent.

Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $80,000. The all-equity plan would result in 18,000 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?

Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $80,000. The all-equity plan would result in 18,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

EPS

Plan 1: 80000 - 5000 /12000 = 6.25

plan 2: 80000 - 7750/8700 = 8.31

all equity: 80000/18000 = 4.44

b)

Plan 1 and all equity

(EBIT- 5000)/12000 = EBIT/18000

EBIT = 15000

Plan 2 and equity

(EBIT - 7750)/.8700 = EBIT/18000

EBIT = 15000

c) (EBIT- 5000)/12000 = (EBIT - 7750)/.8700

EBIT = 15000

d) EPS

Plan 1: 80000(1-0.4) - 5000(1-0.4) /12000 = 3.75

plan 2: 80000(1-0.4) - 7750(1-0.4)/8700 = 4.98

all equity: 80000(1-0.4)/18000 = 2.67

e)Plan 1 and all equity

(EBIT- 5000)(1-0.4)/12000 = EBIT(1-0.4)/18000

EBIT = 15000

Plan 2 and equity

(EBIT - 7750)(1-0.4)/.8700 = EBIT(1-0.4)/18000

EBIT = 15000

f) (EBIT- 5000)(1-0.4)/12000 = (EBIT - 7750)(1-0.4)/.8700

EBIT = 15000

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