I am having trouble with b and d2 below. Please don\'t round intermediate soluti
ID: 2753741 • Letter: I
Question
I am having trouble with b and d2 below. Please don't round intermediate solutions.
1.
value:
16.66 points
Kolby Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $100,000 in debt. Plan II would result in 8,700 shares of stock and $155,000 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 $80,000. The all-equity plan would result in 18,000 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.)
Kolby Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $100,000 in debt. Plan II would result in 8,700 shares of stock and $155,000 in debt. The interest rate on the debt is 5 percent.
Explanation / Answer
b.
EBIT LEVELS FOR PLAN I & ALL EQUITY PLAN
pLAN I ALL EQUITY PLAN
Let EBIT E E
Less Interest $ 5,000 Nil
EBT E-5000 E
No. of Shares 12,000 18,000
EPS = EBT/NO. OF SHARES
For indifference between the above plans , EPS should be equal .
So E-5000/12000=E/18000
By cross multiplication 18000(E-5000)=12000(E)
18000E-90000000=12000E
18000E-12000E=90000000
6000E = 90000000
So E = 90000000/6000 = $ 15,000
Hence, At EBIT Level of $ 15,000 EPS of Plan I and All equity Plan is equal
EBIT LEVELS OF PLANT II AND ALL EQUITY PALN
PLAN II ALL EQUIYT PLAN
LetEBIT be E E
Less Interet $ 7750 nil
EBT E-7750 E
No. of shares 8700 18000
ESP=EBT/No. of Shares
For indifference between the abveo two alternatives, EPS shoudl be equal So, E-7750/8700=E/18000
bY cross multiplying, we get 18000(E-7750)=8700E
18000E-139500000=8700E
18000E-8700E=139500000
9300E=139500000
Hence E=139500000/9300 = $ 19109.58
d2
EBIT LEVELS OF PLAN I ADN ALL EQUITY PLAN
Plan I All equity
Let EBIT be E E
less Interest $ 5000 Nil
EPS = EAT/NO. OF SHARES
Hence EBIT levels are = 0.6E - 3000/12000=0.6E/18000
By cross multiplying we get 18000(0.6E-3000)=12000(0.6E)
10800E-54000000=7200E
10800E-7200E=54000000
3600E=54000000; Hence E = 54000000/3600E=15000
EBIT LEVELS FOR PLAN II AND ALL EQUITY PLAN
PLAN II ALL EQUITY PLAN
Let EBIT be E E
Less interst 7750 Nil
EBT E-7750 E
Less tax @ 40% 0.4E-3100 0.4E
EAT 0.6E-4650 0.6E
No. of shares 8700 18000
Hence, EPS = EAT/No. of shares
So, EBIT LEVELS ARE = 0-6E-4650/8700=0.6E/18000
By cross multiplying ; 18000(0.6E-4650)=8700((0.5E)
10800E-83700000=5220E
10800E-5220E=83700000;
5580E = 83700000
Hence, E = 83700000/5580 = $ 15000
So, At EBIT level of $ 15000 EPS of both alternatives will be eual
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