Haskell Corp. is comparing two different capital structures. Plan I would result

Question

Haskell Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $100,000 in debt. Plan II would result in 5,000 shares of stock and $200,000 in debt. The interest rate on the debt is 6 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? (Do not round intermediate calculations and 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? (Do not round intermediate calculations.)

Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)

Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Do not round intermediate calculations and 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? (Do not round intermediate calculations.)

Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations.)

Haskell Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $100,000 in debt. Plan II would result in 5,000 shares of stock and $200,000 in debt. The interest rate on the debt is 6 percent.

Explanation / Answer

a) EPS under two plans

Description Plan I Plan II All equity

Equity in Nos 10000 5000 15000

Debt 100000 200000 0

EBIT 60000 60000 60000

Interest on Debt @ 6% 6000 12000 0

EBT (After Interest) 54000 48000 60000

EPS 5.40 9.60 4.00

b) Break even EBIT Plan1 Plan 2 All equity

EBIT 18000 18000 18000

Interest 6000 12000 0

Net available for share holders 12000 6000 18000

EPS 1.20 1.20 1.20

Break Even level of EBIT is 18000 for all the plans before and after the corporate taxes implemented

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