Haskell Corp. is comparing two different capital structures. Plan I would result

Question

Haskell Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 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 14,000 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.)

EPS -- Plan I $ Plan II $ All equity $

b. 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.)

EBIT -- Plan I and all-equity $ Plan II and all-equity $

c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)

EBIT $

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.)

EPS -- Plan I $ Plan II $ All equity $

d-2 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.)

EBIT -- Plan I and all-equity $ Plan II and all-equity $

d-3 Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations.)

EBIT $

Explanation / Answer

a.

b. Plan I and all equity:

Let the breakeven EBIT be B

Therefore B / 14,000 =( B - 4,800) / 11,000 or

B = $ 22,400

Plan II and all equity:

B/ 14,000 = ( B - 9,000) / 8,375 or

B = $ 22,400

c. Let the level of EBIT where EPS for Plan I and Plan II are identical be E:

Hence, ( E - 4,800) / 11,000 = ( E - 9,000) / 8,375 or

E = $ 22,400

d-1.

d-2. Break-even levels of EBIT:

Plan I and all equity:

Let the break-even level of EBIT be B.

0.6 B / 14,000 = 0.6 x( B - 4,800 ) / 11,000 or

B = $ 22,400

Plan II and all equity:

0.6 B / 14,000 = 0.6( B- 9,000) / 8,375 or

B = $ 22,400

d-3. $ 22,400

All equity Plan I Plan II EBIT $ 60,000 $ 60,000 $ 60,000 Interest expense - 4,800 9,000 Net earnings $ 60,000 $ 55,200 $ 51,000 Number of shares outstanding 14,000 11,000 8,375 Earnings per share $ 4.29 $ 5.02 $ 6.09

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