Kolby Corp. is comparing two different capital structures. Plan I would result i
ID: 2762230 • Letter: K
Question
Kolby Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent.
A.) 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 14,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Phase I EPS ?
Phase II EPS ?
All Equity EPS ?
B.) In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations.)
Phase I All Equity EBIT ?
Phase II All Equity EBIT ?
C.) Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
EBIT ?
D-1.)Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Phase I EPS ?
Phase II EPS ?
All Equity EPS ?
D-2) Asuming 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? (Do not round intermediate calculations.)
Phase I All Equity EBIT ?
Phase II All Equity EBIT ?
D-3 Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
EBIT ?
Kolby Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent.
A.) 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 14,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Phase I EPS ?
Phase II EPS ?
All Equity EPS ?
B.) In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations.)
Phase I All Equity EBIT ?
Phase II All Equity EBIT ?
C.) Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
EBIT ?
D-1.)Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))
Phase I EPS ?
Phase II EPS ?
All Equity EPS ?
D-2) Asuming 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? (Do not round intermediate calculations.)
Phase I All Equity EBIT ?
Phase II All Equity EBIT ?
D-3 Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
EBIT ?
Explanation / Answer
Solution:
A) Calculation of EPS of each of these plans
All Equity
Plan I
Plan II
EBIT
$60,000
$60,000
$60,000
Less: Interest on Debt
$0
($4,800)
($9,000)
EBT
$60,000
$55,200
$51,000
No. of share of stock outstanding
14000
11000
8375
EPS (EBT / No. of Outstanding Stock)
$4.29
$5.02
$6.09
B) Break Even level of EBIT
Between Plan I and All Equity EBIT
(BE/EBIT – Interest) / No. of Shares Outstanding All equity = (BE/EBIT – Interest) / No. of Shares Outstanding Plan I
BE/EBIT / 14,000 = (BE/EBIT - $4,800) / 11,000
11 BE/EBIT = 14 BE/EBIT - $67,200
3 BE/EBIT = $67,200
BE/EBIT = $67,200 / 3 = $22,400
Break Even Level of EBIT between Plan I and All Equity is $22,400
Break Even Level of EBIT between Plan II and All Equity
(BE/EBIT – Interest) / No. of Shares Outstanding All equity = (BE/EBIT – Interest) / No. of Shares Outstanding Plan II
BE/EBIT / 14,000 = (BE/EBIT - $9,000) / 8,375
8,375 BE/EBIT = 14,000 BE/EBIT - $126,000,000
5,625 BE/EBIT = $126,000,000
BE/EBIT = $22,400
C) Calculation of Level (L) at which EPS be identical for Plans I and II
(L – Interest) / No. of Shares Outstanding Plan I = (L – Interest) / No. of Shares Outstanding Plan II
(L - $4,800) / 11,000 = (L - $9,000) / 8,375
8,375 L - $40,200,000 = 11,000 L - $99,000,000
2,625 L = $58,800,000
L = $22,400
At $22,400 EBIT level EPS be identical for Plan I and Plan II
D-1) Calculation of EPS if tax @ 40%
All Equity
Plan I
Plan II
EBIT
$60,000
$60,000
$60,000
Less: Interest on Debt
$0
($4,800)
($9,000)
EBT
$60,000
$55,200
$51,000
Less: Tax @ 40%
($24,000)
($22,080)
($20,400)
Earnings After tax
$36,000
$33,120
$30,600
No. of share of stock outstanding
14000
11000
8375
EPS (EAT / No. of Outstanding Stock)
$2.57
$3.01
$3.65
For balance part -- please ask separate question
All Equity
Plan I
Plan II
EBIT
$60,000
$60,000
$60,000
Less: Interest on Debt
$0
($4,800)
($9,000)
EBT
$60,000
$55,200
$51,000
No. of share of stock outstanding
14000
11000
8375
EPS (EBT / No. of Outstanding Stock)
$4.29
$5.02
$6.09
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