Haskell Corp. is comparing two different capital structures. Plan I would result
ID: 2718058 • Letter: H
Question
Haskell Corp. is comparing two different capital structures. Plan I would result in 8,000 shares of stock and $80,000 in debt. Plan II would result in 6,000 shares of stock and $120,000 in debt. The interest rate on the debt is 6 percent.
a.Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $50,000. The all-equity plan would result in 12,000 shares of stock outstanding. What is the EPS for each of these plans?
b.In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?
c.Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?
d.Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm for plan I, plan II and all-equity?
e.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?
f.Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II?
Explanation / Answer
Answer (a)
Answer (b)
Answer(c)
Answer (d)
Answer (e)
Answer (f)
Particulars Plan I Plan II Plan III Common Shares 8000 6000 12000 Debt $80,000 $120,000 0 Interest rate 6% 6% 0 Interest $4,800 $7,200 $0 EBIT $50,000 $50,000 $50,000 Less: interest $4,800 $7,200 $0 Earning for stockholders $45,200 $42,800 $50,000 No of Common Shares 8000 6000 12000 EPS $5.65 $7.13 $4.17Related Questions
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