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 12,000 shares of stock and $120,000 in debt. Plan II would result in 11,500 shares of stock and $140,000 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 $70,000. 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.) EPS Plan I $ 5.23 Plan II $ 5.36 All equity $ 4.66 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.) EBIT Plan I and all-equity $ 36000 Plan II and all-equity $ 36000 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 answers to 2 decimal places, e.g., 32.16.) EPS Plan I $ Plan II $ All equity $ 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? (Do not round intermediate calculations.) EBIT Plan I and all-equity $ Plan II and all-equity $ 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

Par 1

What is the EPS for each of these plans?

Part 2

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

Part 3

at what level of EBIT will EPS be identical for Plans I and II

I II All-equity EBIT 70000 70000 70000 Interest 7200 8400 0 Net Income 62800 61600 70000 No of shares 12000 11500 15000 EPS 5.23 5.36 4.67

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