DAR Corporation is comparing two different capital structures: an all-equity pla
ID: 2619654 • Letter: D
Question
DAR Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $2.7 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.
If EBIT is $375,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
If EBIT is $625,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
DAR Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and $2.7 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.
Explanation / Answer
a) If EBIT is $375,000, what is the EPS for each plan?
under plan I unlevered company, net income is the same as EBIT with no corporate tax. The EPS under capitalization will be
EPS = $375,000/185000 shares
= 2.02
under plan II levered company, EBIT will be reduced by interest payment. The EPS under capitalization will be
EPS = $375,000-0.05($2,700,000)
=$240,000
=$240,000/135000
=$1.77
b) If EBIT is $625,000, what is the EPS for each plan?
under plan I unlevered company, net income is the same as EBIT with no corporate tax. The EPS under capitalization will be
EPS = $625,000/185000 shares
= 3.38
under plan II levered company, EBIT will be reduced by interest payment. The EPS under capitalization will be
EPS = $625,000-0.05($2,700,000)
=$490,000
=$490,000/135000
=$3.63
EPS plan I 2.02 Plan II 1.77Related Questions
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