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

Question

Destin Corp. is 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 8,700 shares of stock and $155,000 in debt. The interest rate on the debt is 5 percent.

Please correct the wrong answers

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $80,000 The all-equity plan would result in 18,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16)) EPS Plan I Plan II All equity 6.25 8.30 4.44 b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? EBIT Plan I and all-equity Plan Il and all-equity 58280 3 46378 3 c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and l1? EBIT 15000 d-1 Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm (Round your answers to 2 decimal places. (e.g., 32.16)) EPS Plan l Plan II All equity 3.75 4.98 2.67 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? Plan I and all-equity $ Plan Il and all-equity $ EBIT 58400 46465 3 d-3 Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and ll? EBIT 15000

Explanation / Answer

b)The breakeven EBIT between the all-equity capital structure and Plan I is:

EBIT/18,000 = [EBIT – 0.05($100,000)]/12,000
EBIT = $15,000

The breakeven EBIT between the all-equity capital structure and Plan II is:

EBIT/18,000 = [EBIT – 0.05($155,000)]/8,700
EBIT = $15,000

Break-even levels of EBIT with 40% corporate tax:

d-2)The break-even levels of EBIT do not change because the addition of taxes reduces the income of all three plans by the same percentage. Hence, they do not change relative to one another.

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