Haskell Corp. is comparing two different capital structures. Plan I would result
ID: 2737595 • Letter: H
Question
Haskell Corp. is comparing two different capital structures. Plan I would result in 15,000 shares of stock and $100,000 in debt. Plan II would result in 11,500 shares of stock and $170,000 in debt. The interest rate on the debt is 5 percent.
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $70,000. 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 15,000 shares of stock and $100,000 in debt. Plan II would result in 11,500 shares of stock and $170,000 in debt. The interest rate on the debt is 5 percent.
Explanation / Answer
Answer:a
Answer:b Plan I and all-equity:
(EBIT-interest)/No of shares outstanding=EBIT/No of shares outstanding
(EBIT-5000)/15000=EBIT/20000
20000 EBIT-100,000,000=15000 EBIT
5000 EBIT=100,000,000
EBIT=20000
Plan II and all-equity:
(EBIT-interest)/No of shares outstanding=EBIT/No of shares outstanding
(EBIT-8500)/11500=EBIT/20000
20000 EBIT-170,000,000=11500 EBIT
8500 EBIT=170,000,000
EBIT=20000
Answer:c Plan I=Plan II
(EBIT-interest)/No of shares outstanding=(EBIT-interest)/No of shares outstanding
(EBIT-5000)/15000=(EBIT-8500)/11500
11500 EBIT-575,00,000=15000 EBIT-127,500,000
3500 EBIT=700,00,000
EBIT=20000
Answer:d-1
Answer:d-2
Plan I and all-equity:
(EBIT-interest)*(1-tax) /No of shares outstanding=EBIT*(1-tax) /No of shares outstanding
(EBIT-5000)*(1-0.40) /15000=EBIT*(1-0.40) /20000
EBIT=20000
Plan II and all-equity:
(EBIT-interest)*(1-tax)/No of shares outstanding=EBIT*(1-tax)/No of shares outstanding
(EBIT-8500)*(1-0.40)/11500=EBIT*(1-0.40)/20000
EBIT=20000
Answer:d-3
Plan I=Plan II
(EBIT-interest)*(1-tax)/No of shares outstanding=(EBIT-interest)*(1-tax)/No of shares outstanding
(EBIT-5000)*(1-0.40)/15000=(EBIT-8500)*(1-0.40)/11500
EBIT=20000
Particulars Plan I Plan II All equity EBIT 70000 70000 70000 Less: interest 5000 8500 0 EBT 65000 61500 70000 Less: tax 0 0 0 Net income 65000 61500 70000 No. of shares outstanding 15000 11500 20000 EPS 4.33 5.35 3.50Related Questions
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