Destin Corp. is comparing two different capital structures. Plan I would result
ID: 2719839 • Letter: D
Question
Destin Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 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 $60,000. The all-equity plan would result in 14,000 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 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent.
Explanation / Answer
Answer:
a) TO CALCULATE THE INTERST ON DEBT IT HAS TO BE = $150000*6% = 9000
b) Since the all equity plan and plan ! doesnt have any debt therefore the breakeven for plan 1 and all equity would be same where there is no pv ration and it is equal to zero
whereas for plan 2 and equity plan it is breakeven in terms of PV ration = fixed cost / Contribution
= 9000/60000 = 15%
c) at what level the EBIt and eps would be same therefore
EBIT = EBIT/ No of shares
therefore at EBIT = 37800 the EPS of both the plans would be 3.43
d- a) giving the tax impliccation then it would be
d b) There wont any effect in terms of plan 1and equity but certainly there would be some impact on the plan 2 and equity therefore the PV ration would increase to 49%
d- c ) After considering the tax implication the EBIT would be at which it identicals the EPS of both Plan 1 and Plan 2
It would remains the same at EBIT 37700 the EPS would be similar for both the plans only the EPS would reduce to 2.05
Thank you
Particulars Plan I Plan II All equity EBIT 60000 60000 60000 Less: Interest 0 9000 0 Profit before tax 60000 51000 60000 No tax implication 0 0 0 Profit after tax 60000 51000 60000 No of ahres outstanding 11000 8375 14000 EPS = Profit after tax / Shares 5.454545 6.089552 4.285714Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.