DAR Corporation is comparing two different capital structures: an all-equity pla
ID: 2718740 • 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 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.7 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.
If EBIT is $325,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
EPS
Plan I$:
Plan II$:
If EBIT is $575,000, 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 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.7 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.
Explanation / Answer
ANSWER a
EBIT => 325000
PLAN 1 SHARE 175000
EPS PALN 1 => 325000 / 175000 => $1.86 PER SHARE.
PLAN II
EBT => 325000 - INT(1700000*5%)
EBT => 240000
EPS PLAN II=> 240000 / 125000 => $1.92 PER SHARE
ANSWER b
EBIT => 575000
PLAN 1 SHARE 175000
EPS PALN 1 => 575000 / 175000 => $3.29 PER SHARE.
PLAN II
EBT => 575000 - INT(1700000*5%)
EBT => 490000
EPS PLAN II=> 490000 / 125000 => $3.92 PER SHARE
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