Kyle Corporation is comparing two different capital structures, an all-equity pl
ID: 2753472 • Letter: K
Question
Kyle Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Kyle would have 745,000 shares of stock outstanding. Under Plan II, there would be 495,000 shares of stock outstanding and $8.25 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes.
Assume that EBIT is $2.2 million. Compute the EPS for both Plan I and Plan II. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32
Assume that EBIT is $3.7 million. Compute the EPS for both Plan I and Plan II. (Do not round intermediate calculations. 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).)
Requirement 1:Assume that EBIT is $2.2 million. Compute the EPS for both Plan I and Plan II. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32
Explanation / Answer
Kyle Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Kyle would have 745,000 shares of stock outstanding. Under Plan II, there would be 495,000 shares of stock outstanding and $8.25 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes.
Requirement 1:
Assume that EBIT is $2.2 million. Compute the EPS for both Plan I and Plan II. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32
EPS
Plan I
$
Plan II
$
EPS=Earnings after interest and taxes/Number of outstanding shares
Plan 1 =No debt capital
EPS=2200000/745000=2.95 per share
Plan 2
495000 shares + 8.25m Debt
Interest on debt=11 %
Interest=907500
EAT=2200000-907500=1292500
EPS=1292500/495000=2.61 per share
Requirement 2:
Assume that EBIT is $3.7 million. Compute the EPS for both Plan I and Plan II. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
Plan 1
EPS=3700000/745000=4.97 per share
Plan 2
EPS=3700000/495000=7.47 per share
EPS
Plan I
$
Plan II
$
Requirement 3:
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).)
Break-even EBIT
$
EBIT = (EPS * Number of Common Shares Outstanding) + Preferred Share Dividends / (1 - Tax Rate) + Debt Interest
Plan 1 =2.95*745000 +0/0=2197750
At 2197750 EPS will remain unaffected .
Plan 2
=2.61 * 495000 + .11=11745000
At 11745000,EPS will remain unaffected.
Requirement 1:
Assume that EBIT is $2.2 million. Compute the EPS for both Plan I and Plan II. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32
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