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 18,000 shares of stock and $95,000 in debt. Plan I would result in 14,000 shares of stock and $190,000 in debt. The interest rate on the debt is 5 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? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Plan l Plan II All equity EPS $4.74 $5.75 $4.09 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 Plan Il and all-equity c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans and ? (Do not round intermediate calculations.) EBIT

Explanation / Answer

a)

Plan 1 = (90000 - 5%*95000) / 18000 = 4.74

Plan 2 = (90000 - 5%*190000) / 14000 = 5.75

All equity = (90000) / 22000 = 4.09

b)

Plan 1 = (90000 + 5%*95000) = 94750

Plan 2 = (90000 + 5%*190000) = 99500

c)

(EBIT - 5%*95000) / 18000 = (EBIT - 5%*190000) / 14000

14000*EBIT - 14000*5%*95000 = 18000*EBIT - 18000*5%*190000

EBIT = (18000*5%*190000 - 14000*5%*95000) / (18000-14000)

EBIT = 26125

d)

It will be same breakeven EBIT irrespective of tax rate

Plan 1 = (90000 + 5%*95000) = 94750

Plan 2 = (90000 + 5%*190000) = 99500

d-3)

Same with the eps also, tax rate dont have any impact

EBIT = 26125

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