Haskell Corp. is comparing two different capital structures. Plan I would result
ID: 2733691 • Letter: H
Question
Haskell Corp. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $60,000 in debt. Plan II would result in 5,000 shares of stock and $140,000 in debt. The interest rate on the debt is 10 percent. a. 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 12,000 shares of stock outstanding.
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.)
d-1
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.)
Explanation / Answer
Answer d-1.
EBIT = $60,000
Tax Rate = 40%
Plan 1 : Shares = 9,000 and 10% Debt = $60,000
EAT = (EBIT – Interest) * (1 - tax rate)
= (60,000 – 6,000)*(1 - 0.40)
= $32,400
EPS = EAT / Number of shares
= 32,400/9,000 = $3.60
Plan 2 : Shares = 5,000 and 10% Debt = $140,000
EAT = (EBIT – Interest) * (1 - tax rate)
= (60,000 – 14,000)*(1 - 0.40)
= $27,600
EPS = EAT / Number of shares
= 27,600/5,000 = $5.52
All Equity Plan : Shares = 12,000
EAT = EBIIT * (1 - tax rate)
= 60,000*(1 - 0.40)
= $36,000
EPS = EAT / Number of shares
= 36,000/12,000 = $3.00
Answer d-2.
Let x be the break-even EBIT between Plan 1 and all equity plan.
Therefore, (x-6,000)*(1-0.40)/9,000 = x*(1-0.40)/12,000
X = $24,000
Let y be the break-even EBIT between Plan 1 and all equity plan.
Therefore, (y-14,000)*(1-0.40)/5,000 = y*(1-0.40)/12,000
y = $24,000
Answer d-3.
Let x be the break-even EBIT between Plan 1 and Plan 2.
Therefore, (x-6,000)*(1-0.40)/9,000 = (x-14,000)*(1-0.40)/5,000
x = $24,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.