Franklin Corporation is comparing two different capital structures, an all-equit
ID: 2757609 • Letter: F
Question
Franklin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.7 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes.
If EBIT is $325,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
If EBIT is $575,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
What is the break-even EBIT? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
a.
If EBIT is $325,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Particulars
Plan I
Plan II
EBIT
3,25,000
3,25,000
(-)Interest [ 1.7 million*5%]
0
85000
EAT
325000
2,40,000
Outstanding stock
1,75,000
1,25,000
EPS
1.86
1.92
Particulars
Plan I
Plan II
EBIT
5,75,000
5,75,000
(-)Interest [ 1.7 million*5%]
0
85000
EAT
575000
4,90,000
Outstanding stock
1,75,000
1,25,000
EPS
3.29
3.92
In Breakeven EBIT Earning after tax will be zero.
Particulars
Plan I
Plan II
Breakeven EBIT
0
85,000
(-)Interest [ 1.7 million*5%]
0
85000
EAT
0
0
Particulars
Plan I
Plan II
EBIT
3,25,000
3,25,000
(-)Interest [ 1.7 million*5%]
0
85000
EAT
325000
2,40,000
Outstanding stock
1,75,000
1,25,000
EPS
1.86
1.92
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