Yasmin Corporation is comparing two different capital structures, an all- equity
ID: 2757665 • Letter: Y
Question
Yasmin Corporation is comparing two different capital structures, an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the Yasmin would have 172,500 shares of stock outstanding. Under Plan II, there would be 69,000 shares of stock outstanding and $1.725 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
If EBIT is $ 230,000, Plan I's EPS is $ while Plan II's EPS is $ . (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
If EBIT is $ 747,000, Plan I's EPS is $ and Plan II's EPS is $ . (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))
The break-even EBIT is $ . (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32))
Yasmin Corporation is comparing two different capital structures, an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the Yasmin would have 172,500 shares of stock outstanding. Under Plan II, there would be 69,000 shares of stock outstanding and $1.725 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
Explanation / Answer
(a)
Plan I EPS = 1.33
Plan II EPS = 0.83
EBIT = 230,000$, No taxes,
Plan I
Under Plan I, so Earnings After Tax = EAT = 230,000$
No fo Shares outstanding 172500
EPS = EAT/ No of Shares = 230000/172500 = 1.33
EPS under Plan I = 1.33
Plan II , Debt = 1.725 Million = 1,725,000
Interest on this debt, 10%, 172500
Earnings after Tax in Plan II = 230000 - 172500 = 57500
No of Shares in Plan II = 69000
EPS under Plan II = 57500/69000 = 0.83
(b)
Plan I EPS = 4.33
Plan II EPS = 8.33
Workings
EBIT 747,000
Plan I EPS = 747000/172500 = 4.33
Plan II EPS
EAT = 747000 - 172500 = 574500
Plan II EPS = 574500/69000 = 8.33
(c) The Breakeven EBIT is
EBIT = 287500
Workings
EPS = (EBIT - I) x (1.0 - TR) / Equity number of shares after implementing financing plan
UNDER PLAN I , NO interest
Under PLAN II , Where I is interest = 10% = 172500
TR , tax rate = 0
Hence EPS under both Plan are equal
EBIT/172500 = (EBIT - 172500)/69000
69000 EBIT = 172500 EBIT - 172500*172500
103500 EBIT = 172500*172500
EBIT = (172500)^2/103500
EBIT = 287500
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