Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2730079 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $430,000 in debt. Plan II would result in 12,600 shares of stock and $275,200 in debt. The interest rate on the debt is 9 percent. Requirement 1: Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $54,000. 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).) EPS Plan I $ 1.70 Plan II $ 2.32 All-equity plan $ 2.84 Requirement 2: (a) 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.) EBIT $ (b) 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.) EBIT $ Requirement 3: Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.) EBIT $ Requirement 4: Assume the corporate tax rate is 32 percent. (a) Compute the EPS for each plan. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) EPS Plan I $ Plan II $ All-equity plan $ (b) 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.) EBIT $ (c) 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.) EBIT $ (d) At what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.) EBIT $Explanation / Answer
Answer:(a) Requirement 1:
Requirement 2:
Answer :
Plan 1 =All equity plan
EBIT-38700/9000=EBIT/19000
19000 EBIT-735300,000=9000 EBIT
10000 EBIT=735300000
EBIT=73530
Answer: BEP=Plan II or All equity plan
EBIT-24768/12600=EBIT/19000
19000 EBIT-470592000=12600 EBIT
6400 EBIT=470592000
EBIT=73530
Answer:
Plan I=Plan II
EBIT-38700/9000=EBIT-24768/12600
12600 EBIT-487620000=9000 EBIT-222912000
3600 EBIT=264708000
EBIT=73530
Requirement 4:
Answer:
Answer :
Plan 1 =All equity plan
(EBIT-38700)*(1-0.32)/9000=EBIT*(1-0.32)/19000
(19000 EBIT-735300,000)*0.68=9000 EBIT*0.68
12920 EBIT-500004000=6120 EBIT
EBIT=500004000/6800=73530
Answer: BEP=Plan II or All equity plan
(EBIT-24768)*(1-0.32)/12600=EBIT*0.68/19000
EBIT=73530
Answer:
Plan I=Plan II
(EBIT-38700)*0.68/9000=(EBIT-24768)*0.68/12600
EBIT=73530
Particulars Plan I Plan II All equity plan EBIT 54000 54000 54000 Less: interest 38700 24768 EBT 15300 29232 54000 Less: tax 0 0 0 EAT 15300 29232 54000 No of shares outstanding 9000 12600 19000 EPS 1.70 2.32 2.84Related Questions
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