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 9,000 shares of stock and $70,000 in debt. Plan II would result in 3,000 shares of stock and $140,000 in debt. The interest rate on the debt is 5 percent.

Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $60,000. The all-equity plan would result in 15,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16))

In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?

Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?

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))

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?

Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II?

Destin Corp. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $70,000 in debt. Plan II would result in 3,000 shares of stock and $140,000 in debt. The interest rate on the debt is 5 percent.

Explanation / Answer

Destin Corp Details Plan I Plan II All Equity Plan No Of Equity Shares                      9,000               3,000                         15,000 Amount Of Debt                    70,000          140,000                                  -   EBIT                    60,000             60,000                         60,000 Interest on Debt @5%                    3,500               7,000                                  -   Earning Before Tax                  56,500             53,000                         60,000 Tax                             -                        -                                    -   Net Earning                  56,500             53,000                         60,000 EPS   $                  6.28 $           17.67 $                         4.00 2a. Assume break even EBIT for Plan I & All Equity =k k-3500/9000=k/15000 15000k-52500000=9000k k= 8750 So Break even EBIT =$8750 2b Assume break even EBIT for Plan II & All Equity =k k-7000/3000=k/15000 15000k-105000000=3000k k=8750 So Break even EBIT =$8750       3 At EBIT $ 8750 the EPS for Plan I & II are same ($0.58)       4 Details Plan I Plan II All Equity Plan 4a No Of Equity Shares                      9,000               3,000                         15,000 Amount Of Debt                    70,000          140,000                                  -   EBIT                    60,000             60,000                         60,000 Interest on Debt @5%                    3,500               7,000                                  -   Earning Before Tax                  56,500             53,000                         60,000 Tax @40%                  22,600             21,200                         24,000 Net Earning                  33,900             31,800                         36,000 EPS   $                  3.77 $           10.60 $                         2.40 4b Assume break even EBIT for Plan I & All Equity =k (k-3500)*0.60/9000=k*0.60/15000 k=8750 So Break even EBIT =$61,880 4c Assume break even EBIT for Plan II & All Equity =k (k-7000)*0.60/3000=k*0.60/15000 k=8750 So Break even EBIT =$8750 4d At $8750 level the EPS for Plan I & Ii will be same ($0.35)

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