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

Question

Kolby Corp. is comparing two different capital structures. Plan I would result in 15,000 shares of stock and $100,000 in debt. Plan II would result in 11,500 shares of stock and $170,000 in debt. The interest rate on the debt is 5 percent.

  

Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $70,000. The all-equity plan would result in 20,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your final 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? (Do not round intermediate calculations.)

  

  

Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)

   

   

Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Do not round intermediate calculations and round your final 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? (Do not round intermediate calculations.)

   

   

Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations.)

  

Thank you so much!

Kolby Corp. is comparing two different capital structures. Plan I would result in 15,000 shares of stock and $100,000 in debt. Plan II would result in 11,500 shares of stock and $170,000 in debt. The interest rate on the debt is 5 percent.

Explanation / Answer

a.

b.

c.

As per question,

(EBIT - 5% * $100,000) / 15,000 = (EBIT - 5% * $170,000) / 11,500

=> 11.5 * EBIT - $57,500 = 15 * EBIT - $127,500

=> EBIT = $20,000

d-1.

d-2.

d-3.

As per question,

(EBIT - 5% * $100,000) * (1 - 40%) / 15,000 = (EBIT - 5% * $170,000) * (1 - 40%) / 11,500

=> 11.5 * EBIT - $57,500 = 15 * EBIT - $127,500

=> EBIT = $20,000

Working EPS Plan I = ($70,000 - 5% * $100,000) / 15,000 $4.33 Plan II = ($70,000 - 5% * $170,000) / 11,500 $5.35 All equity = $70,000 / 20,000 $3.50

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