Destin Corp. is comparing two different capital structures. Plan I would result
ID: 2383246 • Letter: D
Question
Destin 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 8,700 shares of stock and $155,000 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 $80,000. The all-equity plan would result in 18,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16)) EPS Plan I Plan II All equity b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? EB Plan I and all-equity Plan Il and all-equity c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans l and li? EBIT d-1 Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (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? EBIT Plan I and all-equity Plan Il and all-equity d-3 Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans l and lI?Explanation / Answer
A
Plan I
Plan II
All equity
EBIT
80000
80000
80000
Interest
5000
7750
0
Net Income
75000
72250
80000
No share
12000
8700
18000
EPS
6.25
8.30
4.44
B
To find the breakeven EBIT for two different capital structures, we simply set the equations for EPS equal to each other and solve for EBIT. Th
Particulares
Plan I
Plan II
All equity
EBIT
58280
46378
80000
Interest
5000
7750
0
Net Income
53280
38628
80000
No share
12000
8700
18000
EPS
4.44
4.44
4.44
C
Particulares
Plan I
Plan II
EBIT
15000
15000
Interest
5000
7750
Net Income
10000
7250
No share
12000
8700
EPS
0.83
0.83
D
Plan I
Plan II
All equity
EBIT
80000
80000
80000
Interest
5000
7750
0
Net Income
75000
72250
80000
Tax
30000
28900
32000
Net Income
45000
43350
48000
No share
12000
8700
18000
EPS
3.75
4.98
2.67
D
Plan I
Plan II
All equity
D1
EBIT
58400
46465
80000
Interest
5000
7750
0
Income
53400
38715
80000
Tax
21360
15486
32000
Net Income
32040
23229
48000
No share
12000
8700
18000
EPS
2.67
2.67
2.67
D2
Particulares
Plan I
Plan II
EBIT
15000
15000
Interest
5000
7750
Income
10000
7250
Tax
4000
2900
Net Income
6000
4350
No share
12000
8700
EPS
0.50
0.50
A
Plan I
Plan II
All equity
EBIT
80000
80000
80000
Interest
5000
7750
0
Net Income
75000
72250
80000
No share
12000
8700
18000
EPS
6.25
8.30
4.44
B
To find the breakeven EBIT for two different capital structures, we simply set the equations for EPS equal to each other and solve for EBIT. Th
Particulares
Plan I
Plan II
All equity
EBIT
58280
46378
80000
Interest
5000
7750
0
Net Income
53280
38628
80000
No share
12000
8700
18000
EPS
4.44
4.44
4.44
C
Particulares
Plan I
Plan II
EBIT
15000
15000
Interest
5000
7750
Net Income
10000
7250
No share
12000
8700
EPS
0.83
0.83
D
Plan I
Plan II
All equity
EBIT
80000
80000
80000
Interest
5000
7750
0
Net Income
75000
72250
80000
Tax
30000
28900
32000
Net Income
45000
43350
48000
No share
12000
8700
18000
EPS
3.75
4.98
2.67
D
Plan I
Plan II
All equity
D1
EBIT
58400
46465
80000
Interest
5000
7750
0
Income
53400
38715
80000
Tax
21360
15486
32000
Net Income
32040
23229
48000
No share
12000
8700
18000
EPS
2.67
2.67
2.67
D2
Particulares
Plan I
Plan II
EBIT
15000
15000
Interest
5000
7750
Income
10000
7250
Tax
4000
2900
Net Income
6000
4350
No share
12000
8700
EPS
0.50
0.50
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