ques 5 value: 12.50 points Cooke Co. is comparing two different capital structur

Question

ques 5

value: 12.50 points Cooke Co. is comparing two different capital structures. Plan I would result in 8,000 shares of stock and $432,000 in debt. Plan II would result in 13,500 shares of stock and $234,000 in debt. The interest rate on the debt is 9 percent. Requirement 1 Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $54,600. The all-equity plan would result in 20,000 shares of stock outstanding. Compute the EPS for each plan. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) decimal places (e.g, 32.16)) EPS Plan I Plan II All-equity plan Requirement 2 (a) In Requirement (1), what is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations.) EBIT (b) In Requirement (1), what is the break-even level of EBIT for Plan Il as compared to that for an all equity plan? (Do not round intermediate calculations.) EBIT Requirement 3 Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and ? (Do not round intermediate calculations.) EBIT

Explanation / Answer

Requirement 1

EPS = ( EBIT – Interest)/ no. of shares

Plain I EPS = (54000 – 432000 x 0.09)/8000

                     = 15120/8000

                    = 1.89

Plain II EPS = (54000 – 234,000 x 0.09)/13500

                     = 32,940/13,500

                  = 2.44

All equity EPS = (54000 – 0 x 0.09)/ 20000

                                = 2.70

Requirement 2:

Part A:

For breakeven EBIT, EPS of two plans should be the same.

Plan I EPS = All Equity EPS

(EBIT -38,880)/8000 = (EBIT -0)/ 20,000

2.5 EBIT – EBIT = 97200

EBIT= 64800

Part B:

For breakeven EBIT, EPS of two plans should be the same.

Plan II EPS = All Equity EPS

(EBIT -21,060)/13,500 = (EBIT -0)/ 20,000

200 EBIT – 4,212,000 = 135 EBIT

EBIT= 64800

Requirement III

For breakeven EBIT, EPS of two plans should be the same.

Plan I EPS = Plan II EPS

(EBIT -38,880)/8000 = (EBIT -21,060)/13,500

135 EBIT -5248800 =80 EBIT -1684800

EBIT = 64800

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