Destin Corp. is comparing two different capital structures. Plan I would result

Question

Destin Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent.

  

Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $60,000. The all-equity plan would result in 14,000 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?

Destin Corp. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $80,000 in debt. Plan II would result in 8,375 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent.

Explanation / Answer

A. EPS

B.

EBIT/14,000 = [EBIT – .06($80,000)]/11,000

EBIT/14,000 = [EBIT – .06($150,000)]/8,375  

C.

Setting the equations for EPS from Plan I and Plan II equal to each other and solving for EBIT, we get

[EBIT – .06($80,000)]/11,000 =[EBIT – .06($150,000)]/8,375 = $22,400

D1

D2

EBIT(1 – .40)/14,000 = [EBIT – .06($80,000)](1 – .40)/11,000

D3

[EBIT – .06($80,000)](1 – .40)/11,000 = [EBIT – .06($150,000)](1 – .40)/8,375 = $13,440

I II All-Equity EBIT $60,000 $60,000 $60,000 Interest -$4,800(80,000*6%) -$9,000($150,000*6%) 0 Net Income $55,200 $51,000 $60,000 EPS =55,200/11,000 = 5.02 =51,000/8,375 = 6.09 60,000/14,000=4.29

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