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?

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ONLY NEED B thorugh D (Already completed A)

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

b) Break-even level is when EPS = 0, implies net income =0
Here there are no taxes, so EBIT should be equal to interest rates
Plan I: EBIT = 100000*6% = 6000
Plan II: EBIT = 200000*6% = 12000

c) Lets solve this as follows
Plan I EPS = Plan II EPS
(EBIT-6000)/14000 = (EBIT-12000)/8000
8*EBIT - 48000 = 14*EBIT - 168000
6*EBIT= 120000
Solving above equation we get EBIT as 20,000

d1) Plan I:
Net income = (80000 - 6000) * (1-40%) = 44400
EPS = 44400 / 14000 = 3.17

Plan I:
Net income = (80000 - 12000) * (1-40%) = 40800
EPS = 40800 / 8000 = 5.10

All Equity:
Net income = (80000) * (1-40%) = 48000
EPS = 48000 / 20000 = 2.40

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