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 14,000 shares of stock and $100,000 in debt. Plan II would result in 8,000 shares of stock and $200,000 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 $80,000. The all-equity plan would result in 20,000 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 14,000 shares of stock and $100,000 in debt. Plan II would result in 8,000 shares of stock and $200,000 in debt. The interest rate on the debt is 6 percent.

Explanation / Answer

a) EPS in plan I = 74000/14000 = 5.29 per share

Plan II = 68000/8000 = 8.5 per share

All equity = 80000/20000 = 4 per share

b) Break even level of EBIT

Plan I and All equity = 20000 * 5.29, EBIT = 105800

Plan II and all equity = 20000 * 8.5 = 170000

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