comparing two different capital structures. Plan I would result in 12,000 shares
ID: 2738275 • Letter: C
Question
comparing two different capital structures. Plan I would result in 12,000 shares of stock and $100,000 in debt. Plan II would result in 7,200 shares of stock and $160,000 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 $90,000. 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 final 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 final 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, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.) EBIT $ ReferenceseBook & Resources
Explanation / Answer
a)if EBIT is 90,000 calculation of eps for these three plans
b)
Break-even EBIT level is the indifferent point where EPS under alternative financing plan is the same. Mathematically, the break-even EBIT level is:
(EBIT* - I1) (1 – t) (EBIT* - Ie) (1- t)
--------------------------- = -------------------------
n1 n2
Where,
EBIT* = indifference point between the two alternative financing plans
I1, Ie= interest expenses
t = income-tax rate
n1, n2 = number of equity shares outstanding after adopting financing plans 1and all equity plan
if i assumed ebit is x
i)x-10000/12000=x/20000
x-10000=0.6x
0.4x=10000
x=$ 25,000
so breakeven EBIT is = $ 25000
ii)
x-16000/7200=x/20000
x-16000=0.36x
0.64x=16000
x=$ 25,000
so breakeven EBIT is = $ 25000
c)
x-16000/7200=x-10000/12000
x-16000=(x-10000)0.6
x-16000=0.6x-6000
0.4x=10000
so breakeven EBIT is = $ 25000
d)i)EBIT is 90000 and tax rate 40% calculation of EPS is
d)ii)
i)(x-10000)/12000=x(0.6)/20000
x-10000=0.6x
0.4x=10000
x=$ 25,000
so breakeven EBIT is = $ 25000
ii)
(x-16000)0.6/7200=x0.6/20000
x-16000=0.36x
0.64x=16000
x=$ 25,000
so breakeven EBIT is = $ 25000
diii)
(x-16000)0.6/7200=(x-10000)0.6/12000
x-16000=(x-10000)0.6
x-16000=0.6x-6000
0.4x=10000
so breakeven EBIT is = $ 25000
particulars plan 1 plan 2 all equity EBIT 90000 90000 90000 interest 10000 16000 0 EBT 80000 74000 90000 shares outstanding 12000 7200 20000 EPS 6.666667 10.27778 4.5Related Questions
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