Destin Corp. is comparing two different capital structures. Plan I would result
ID: 2707803 • Letter: D
Question
Destin Corp. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $80,000 in debt. Plan II would result in 7,500 shares of stock and $120,000 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 $50,000. The all-equity plan would result in 12,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16))
In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?
Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?
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))
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?
Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II?
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $50,000. The all-equity plan would result in 12,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
PART-D1
PARTICULARS
PLAN-1
PLAN-2
ALL EQUITY
EBIT
50000
50000
50000
LESS: -INTEREST
80000*8%
=6400
120000*8%
=9600
NIL
PBT
43600
40400
50000
LESS:-TAX @ 40%
17440
16160
20000
PAT
26160
24240
30000
NO OF SHARES OUTSTANDING
9000
7500
12000
EPS
26140/9000
=2.90
24240/7500
=3.23
30000/12000
=2.5
PART-D1
PARTICULARS
PLAN-1
PLAN-2
ALL EQUITY
EBIT
50000
50000
50000
LESS: -INTEREST
80000*8%
=6400
120000*8%
=9600
NIL
PBT
43600
40400
50000
LESS:-TAX @ 40%
17440
16160
20000
PAT
26160
24240
30000
NO OF SHARES OUTSTANDING
9000
7500
12000
EPS
26140/9000
=2.90
24240/7500
=3.23
30000/12000
=2.5
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