Kolby Corp. is comparing two different capital structures. Plan I would result i
ID: 2744538 • Letter: K
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.)
EBIT
These are all the correct answers, but I only understand how to get part (a) why is almost everything 20,000? Could you go through steps? Thank you!
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. Plan I EPS=(70000-(100000*5%))/15000 Shares 4.33 Plan II EPS=(70000-(170000*5%))/11500 Shares 5.35 All Equity EPS=70000/20000 Shares 3.5 EPS Plan I 4.33 $ Plan II 5.35 $ All equity 3.50 $ b.Plan I To breakeven, EPS is equal for Plan I & all-equity capital structure So, equating the two EPS, we get, Let x be the EBIT EPS=(x-(100000*5%))/15000 Shares=x/20000 Solving for x, x= EBIT= $ 20000 Plan II Similar to above, EPS=(x-(170000*5%))/11500 =x/20000 Solving for x, x= EBIT= $ 20000 EBIT Plan I and all-equity 20,000 $ Plan II and all-equity 20,000 $ c.We have to equate the EPS of the two plans Similarly,assuming EBIT as the variable 'x' (x-(100000*5%))/15000 Shares=(x-(170000*5%))/11500 Solving this equation, we get, x=EBIT= 20000 d-1 Assuming corporate tax rate is 40 percent, EPS of the firm under Plan I EPS=((70000-(100000*5%))*60%)/15000 Shares 2.60 Plan II EPS=((70000-(170000*5%))*60%)/11500 Shares 3.21 All Equity EPS=(70000*60%)/20000 Shares 2.1 EPS Plan I 2.6 Plan II 3.21 All equity 2.1 d2Plan I To breakeven, EPS is equal for Plan I & all-equity capital structure EBIT So, equating the two EPS, we get, Plan I and all-equity 20,000 $ Let x be the EBIT Plan II and all-equity 20,000 $ EPS=((x-(100000*5%))*60%)/15000 Shares=(x*60%)/20000 Solving for x, x= EBIT= $ 20000 Plan II Similar to above, EPS=((x-(170000*5%))*60%)/11500 =(x*60%)/20000 Solving for x, x= EBIT= $ 20000 d3 .We have to equate the EPS of the two plans Similarly,assuming EBIT as the variable 'x' ((x-(100000*5%))*60%)/15000 Shares=((x-(170000*5%))*60%)/11500 Solving this equation, we get, x=EBIT= 20000
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