Haskell Corp. is comparing two different capital structures. Plan I would result
ID: 2740657 • Letter: H
Question
Haskell Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $120,000 in debt. Plan II would result in 11,500 shares of stock and $140,000 in debt. The interest rate on the debt is 6 percent. d-2 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? (Do not round intermediate calculations.) EBIT Plan I and all-equity $ Plan II and all-equity $ d-3 Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations.) EBIT $
Explanation / Answer
Answer:d2 EBIT :
Plan I and all-equity:
(EBIT-Interest)*(1-tax )/Number of shares outstanding=EBIT*(1-tax rate)/Number of shares outstanding
(EBIT-7200)*(1-0.40)/12000 shares=EBIT*(1-0.40)/15000 shares
0.60 EBIT-4320/12000 shares=0.60 EBIT/15000 shares
(0.60 EBIT-4320)*15000=0.60 EBIT*12000
9000 EBIT-6480,00,00=7200 EBIT
EBIT=64800000/1800
=36000
Plan II and all-equity:
(EBIT-Interest)*(1-tax )/Number of shares outstanding=EBIT*(1-tax rate)/Number of shares outstanding
(EBIT-8400)*(1-0.40)/11500 shares=EBIT*(1-0.40)/15000 shares
0.60 EBIT-5040/11500 shares=0.60 EBIT/15000 shares
(0.60 EBIT-5040)*15000=0.60 EBIT*11500
9000 EBIT-7560,00,00=6900 EBIT
EBIT=75600000/2100
=36000
Answer:d-3 EPS will be identical for Plans I and II when EBIT is:
Plan I=Plan II
(EBIT-Interest)*(1-tax )/Number of shares outstanding=(EBIT-Interest)*(1-tax )/Number of shares outstanding
(EBIT-7200)*(1-0.40)/12000 shares=(EBIT-8400)*(1-0.40)/11500 shares
0.60 EBIT-4320/12000 shares=0.60 EBIT-5040/11500 shares
(0.60 EBIT-4320)*11500=(0.60 EBIT-5040)*12000
6900 EBIT-49680000=7200 EBIT-60480000
EBIT=10800000/300
=36000
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