Kolby Corp. is comparing two different capital structures. Plan I would result i
ID: 2816803 • Letter: K
Question
Kolby Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $100,000 in debt. Plan II would result in 4,000 shares of stock and $200,000 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 $70,000. The all-equity plan would result in 20,000 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 and round your answers to the nearest whole number, e.g., 32.)
Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
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 and round your answers to the nearest whole number, e.g., 32.)
Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
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 20,000 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.)
Explanation / Answer
ANSWER:a
Note: interest @ 8% has been taken on debenture amount for calculation of interest .
Above solution is before considering taxes hece EBT has been divided to no of shares for calculation of EPS because EAT (earning after tax) & earning before tax will be same as taxes have to be ignored.
PLAN 1 PLAN 2 ALL EQUITY EBIT 70,000 70000 70000 less : Interest (8000) (16000) - EBT(A) 62000 54000 70000 No of shares (B) 12000 4000 20000 EPS(A/B) 5.17 13.50 3.50Related Questions
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