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 16,000 shares of stock and $100,000 in debt. Plan II would result in 13,000 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 $90,000. The all-equity plan would result in 22,000 shares of stock outstanding. What is the EPS for each of these plans? b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? d-1 Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm?d-2 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? d-3 Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? **This question has already been posted multiple times on Chegg and all answers are incorrect/incomplete** thank you

Explanation / Answer

Hello there!!

a. Plan I: Int. on Debt= 100000*0.06= $6000

EBT= 90000-6000= $84000

EPS= 84000/16000= $5.25

Plan II: Int. on Debt= 150000*0.06= $9000

EBT= 150000-9000= $141000

EPS= 141000/13000= $10.85

Plan III(All Equity): EPS= 90000/22000= $4.09

b.Break-even level represents the amount of revenue or profit that is required to cover total costs, consisting of both fixed and variable costs to the company. Total profit at that point is zero.

in this question for plan I BEL will be= $6000 the cost of debt

for plan II= $9000

for plan III: $0 as there is no obligation of payment.

d-1: plan I: EPS= 84000*(1-0.4) /16000= $3.15

plan II: EPS= 141000*0.6 / 13000= $6.51

plan III: EPS= 90000*0.6 /22000= $2.46

d-2: BEL for

Plan I: 6000+33600(i.e. 84000*0.6)= $39600

PlanII: 9000+56400= $65400

PlanIII: 90000*0.4= $36000

d-3 To be EPS be same Let X be the EBT for Plan I

x*0.6 / 16000= $6.51

x= 16000*6.51 / 0.6

x= $173600

and EBIT should be = 173600+6000

= $179600

Pls provide your feedback if my answers are correct or wrong. There were so many sub parts of a single question. I tried my best.

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