#3) DAR Corporation is comparing two different capital structures: an all-equity
ID: 2743652 • Letter: #
Question
#3)
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 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $2.5 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
If EBIT is $650,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
If EBIT is $900,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
a.
If EBIT is $650,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Plan 1:
EBIT=$650000
Interest =0
EBT=$650000
EPS=EBT/number of shares outstanding=650000/175000=3.71
Plan 2:
EBIT=650000
Interest =2500000*8%=200000
EBT=450000
EPS=450000/125000=3.60
B)
Plan I:
EBIT=$900000
Interest =0
EBT=$900000
EPS=EBT/number of shares outstanding=900000/175000=5.143
Plan 2:
EBIT=900000
Interest =2500000*8%=200000
EBT=700000
EPS=700000/125000=5.60
c) Break even EBIT:
EPS of Plan1=EPS of plan2
X/175000=(x-2,500,000*8%)/125000
125000x/175000=x-200000
200000=x (1-(125/175))
x= 200000/0.2857=700000
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