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 14,000 shares of stock and $100,000 in debt. Plan II would result in 10,800 shares of stock and $180,000 in debt. The interest rate on the debt is 8 percent.

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 18,000 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 14,000 shares of stock and $100,000 in debt. Plan II would result in 10,800 shares of stock and $180,000 in debt. The interest rate on the debt is 8 percent.

Explanation / Answer

a) EPS of all plans:

I = 90000 (EBIT) - 8000 (interest) / 14000 (equity shares) = $5.86 per share

II = 90000 - 14400 / 10800 = $7 per share

III = 90000 / 18000 = $5 per share

b) Break even point of EBIT:

1 & III = ( 5 * 14000 ) + 8000 = $78000

II & III = (5 * 10800) + 14400 = $68400

c) EPS is identical for Plan 1 & II

= X -8000 / 14000 = X - 14400 / 10800

solving fro X, we get

X = $36000

d -1)

EPS of all plans:

I = [(90000 - 8000) 0.60] / 14000= $3.51 per share

II = [(90000 - 14400) 0.60 / 10800 = $4.20 per share

III = 90000 * 0.60 / 18000 = $3 per share

d - 2)

Break even point of EBIT:

1 & III = [( 5 * 14000 ) / 0.60 ]+ 8000 = $78000

II & III = [(5 * 10800) / 0.60 ] + 14400 = $68400

d-3) When tax is 40%, then EPS is identical for Plan 1 & II

= (X -8000) 0.60 / 14000 = (X - 14400) 0.60 / 10800

solving fro X, we get

X = EBIT = $36000

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