Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2720510 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 9,500 shares of stock and $389,500 in debt. Plan II would result in 12,160 shares of stock and $280,440 in debt. The interest rate on the debt is 10 percent.
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $53,800. The all-equity plan would result in 19,000 shares of stock outstanding. Compute the EPS for each plan. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
In Requirement (1), what is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations.)
In Requirement (1), what is the break-even level of EBIT for Plan II as compared to that for an all-equity plan? (Do not round intermediate calculations.)
Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
Compute the EPS for each plan. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
What is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations.)
What is the break-even level of EBIT for Plan II as compared to that for an all-equity plan? (Do not round intermediate calculations.)
At what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
Cooke Co. is comparing two different capital structures. Plan I would result in 9,500 shares of stock and $389,500 in debt. Plan II would result in 12,160 shares of stock and $280,440 in debt. The interest rate on the debt is 10 percent.
Explanation / Answer
Plan I :
No. of Shares = 9,500 shares
Debt = $389,500
Interest rate on the debt = 10 %
EBIT = $53,800
Interest paid on the debt = 10 % of $389,500 = $38,950
Net Profit = EBIT - Interest paid = $53,800 - $38,950 = $14,850.
EPS = Net Profit / No. of Shares = $14,850 / 9,500 = $1.56.
Plan II :
No. of Shares = 12,160 shares
Debt = $280,440
Interest rate on the debt = 10 %
EBIT = $53,800
Interest paid on the debt = 10 % of $280,440 = $28,044
Net Profit = EBIT - Interest paid = $53,800 - $28,044 = $25,756.
EPS = Net Profit / No. of Shares = $25,756 / 12,160 = $2.12.
All Equity Plan :
No. of Shares = 19,000 shares
EBIT = $53,800
EPS = Net Profit (EBIT) / No. of Shares = $53,800 / 19,000 = $2.83.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.