Yasmin Corporation is comparing two different capital structures, an all-equity
ID: 2738268 • Letter: Y
Question
Yasmin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Yasmin would have 160,000 shares of stock outstanding. Under Plan II, there would be 110,000 shares of stock outstanding and $1.4 million in debt outstanding. The interest rate on the debt is 7 percent and there are no taxes. a. If EBIT is $400,000, what is the EPS for each plan? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).) EPS Plan I $ Plan II $ b. If EBIT is $650,000, what is the EPS for each plan? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).) EPS Plan I $ Plan II $ c. 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).)
Explanation / Answer
a)
if EBIT is $ 400,000 calculation of EPS of both plans is
2.745455
b)if EBIT is $ 650000 calculation of EPS of both plans
c) calculation of breakeven EBIT is
Break-even EBIT level is the indifferent point where EPS under alternative financing plan is the same. Mathematically, the break-even EBIT level is:
(EBIT* - I1) (1 – t) (EBIT* - I2) (1- t)
--------------------------- = -------------------------
n1 n2
Where,
EBIT* = indifference point between the two alternative financing plans
I1, I2 = interest expenses
t = income-tax rate
n1, n2 = number of equity shares outstanding after adopting financing plans 1and 2
if i assumed ebit is x
x/160000=x-98000/110000
110000x/160000=x-98000
0.6875x=x-98000
0.3125x=98000
x=98000/0.3125
x=$ 313,600
so breakeven EBIT is = $ 313,600
particulars plan 1 plan 2 EBIT 400000 400000 interest 0 98000 EBT 400000 302000 shares outstanding 160000 110000 EPS 2.52.745455
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