Haskell Corp. is comparing two different capital structures. Plan I would result
ID: 2733492 • Letter: H
Question
Haskell Corp. is comparing two different capital structures. Plan I would result in 16,000 shares of stock and $100,000 in debt. Plan II would result in 12,000 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? (Do not round intermediate calculations and 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? (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.)
Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Do not round intermediate calculations and 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? (Do not round intermediate calculations.)
Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
Haskell Corp. is comparing two different capital structures. Plan I would result in 16,000 shares of stock and $100,000 in debt. Plan II would result in 12,000 shares of stock and $200,000 in debt. The interest rate on the debt is 6 percent.
Explanation / Answer
(a) Computation of the EPS for each of the plan.We have,
(b) The break-even levels of EBIT for plan I.We have,
EBIT / 20,000 = (EBIT - 6,000) / 16,000
16,000 EBIT = 20,000 ( EBIT - 6,000)
16 EBIT = 20EBIT - 120,000
4 EBIT = 120,000
EBIT = 120,000/4 = $ 30,000
The break-even levels of EBIT for plan II.We have,
EBIT /20,000 = (EBIT - 12,000) /12,000
12EBIT = 20 (EBIT - 12,000)
8 EBIT = 240,000
EBIT = $ 30,000
(c)
(EBIT - 6,000)/16,000 = (EBIT - 12,000) / 12,000
12(EBIT - 6,000) = 16(EBIT - 12,000)
12 EBIT - 72,000 = 16 EBIT - 192,000
4 EBIT = 192,000 - 72,000 = 120,000
EBIT = $ 30,000
At the level of $ 30,000 EBIT, the EPS will be identical for plan I and plan II.
(d-1) Computation of EPS for each plan.We have,
(d-2)
Plan I and all-equity:
EBIT(1- 0.40) /20,000 = ( EBIT(1 -0.40) - 6,000) / 16,000
0.6 X 16 EBIT = 0.6 X 20 EBIT - 120,000
9.6 EBIT =12 EBIT - 120,000
2.4 EBIT = 120,000
EBIT = $ 50,000
Plan II and all-equity:
0.60 EBIT /20,000 = (0.60EBIT - 12,000) /12,000
7.2EBIT = 20 (0.60EBIT - 12,000)
7.2 EBIT = 12 EBIT - 240,000
4.80 EBIT = 240,000
EBIT = $ 50,000
(d-3)
(0.6EBIT - 6,000)/16,000 = (0.6EBIT - 12,000) / 12,000
12(0.60EBIT - 6,000) = 16(0.60EBIT - 12,000)
7.2 EBIT - 72,000 = 9.6 EBIT - 192,000
2.4 EBIT = 192,000 - 72,000 = 120,000
EBIT = 120,000 / 2.4
EBIT = $ 50,000
At the level of $ 50,000 EBIT, the EPS will be identical for plan I and plan II.
Particulars Plan I Plan II All equity EBIT 80,000 80,000 80,000 Less: Interest expense 6,000 12,000 0 Earning after tax 74,000 68,000 80,000 Number of shares 16,000 12,000 20,000 EPS 4.62 5.67 4.00Related Questions
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