DAR Corporation is comparing two different capital structures: an all-equity pla
ID: 2733556 • Letter: D
Question
DAR Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II) Under Plan I, the company would have 195,000 shares of stock outstanding. Under Plan II, there would be 145,000 shares of stock outstanding and dollar 2.1 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes. If EBIT is dollar 550.000, what is the EPS for each plan? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) EPS Plan I dollar Plan II dollar If EBIT is dollar 800.000, what is the EPS for each plan? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) EPS Plan I dollar Plan II dollar What is the break even EBIT? (Do not round intermediate calculations and. Enter your answer in dollars, not millions of dollars, e.g., 1.234,567.) Break even EBIT dollarExplanation / Answer
a.EPS for each plan,if EBIT is $550000
EPS = Net income available to stockholders/No of shares outstanding
Plan I :Equity plan
Net income = EBIT - Interest =$550000-0=$550000
No of shares outstanding =195000
EPS = 550000/195000 = $2.82
Plan II:Levered paln
Net income = EBIT - Interest =$550000-(2100000*8%)=$550000-$168000=$382000
No of shares outstanding =145000
EPS = 382000/145000 = $2.635
b.EPS for each plan,if EBIT is $600000
EPS = Net income available to stockholders/No of shares outstanding
Plan I :Equity plan
Net income = EBIT - Interest =$600000-0=$600000
No of shares outstanding =195000
EPS = 600000/195000 = $3.077
Plan II:Levered paln
Net income = EBIT - Interest =$600000-(2100000*8%)=$600000-$168000=$432000
No of shares outstanding =145000
EPS = 432000/145000 = $2.979
c.Break Even EBIT
At Break even EBIT,Earning per share of equity paln is equal to earning per share of levered firm
i.e EBIT/No of shares outstanding = (EBIT-Interest)/No of shares outstanding
EBIT/195000 =(EBIT-$168000)/145000
145EBIT =195EBIT -24360000
50EBIT =24360000
EBIT =$487200
Therefore,Break even EBIT is $487200.
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