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Yasmin Corporation is comparing two different capital structures, an all- equity

ID: 2757665 • Letter: Y

Question

Yasmin Corporation is comparing two different capital structures, an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the Yasmin would have 172,500 shares of stock outstanding. Under Plan II, there would be 69,000 shares of stock outstanding and $1.725 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

If EBIT is $ 230,000, Plan I's EPS is $  while Plan II's EPS is $ . (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

  

If EBIT is $ 747,000, Plan I's EPS is $  and Plan II's EPS is $ . (Do not include the dollar signs ($). Round your answers to 2 decimal places. (e.g., 32.16))

The break-even EBIT is $ . (Do not include the dollar sign ($). Round your answer to the nearest whole dollar amount. (e.g., 32))

Yasmin Corporation is comparing two different capital structures, an all- equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the Yasmin would have 172,500 shares of stock outstanding. Under Plan II, there would be 69,000 shares of stock outstanding and $1.725 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.

Explanation / Answer

(a)

Plan I EPS = 1.33

Plan II EPS = 0.83

EBIT = 230,000$, No taxes,

Plan I

Under Plan I, so Earnings After Tax = EAT = 230,000$

No fo Shares outstanding 172500

EPS = EAT/ No of Shares = 230000/172500 = 1.33

EPS under Plan I = 1.33

Plan II , Debt = 1.725 Million = 1,725,000

Interest on this debt, 10%, 172500

Earnings after Tax in Plan II = 230000 - 172500 = 57500

No of Shares in Plan II = 69000

EPS under Plan II = 57500/69000 = 0.83

(b)

Plan I EPS = 4.33

Plan II EPS = 8.33

Workings

EBIT 747,000

Plan I EPS = 747000/172500 = 4.33

Plan II EPS

EAT = 747000 - 172500 = 574500

Plan II EPS = 574500/69000 = 8.33

(c) The Breakeven EBIT is

EBIT = 287500

Workings

EPS = (EBIT - I) x (1.0 - TR) / Equity number of shares after implementing financing plan

UNDER PLAN I , NO interest

Under PLAN II , Where I is interest = 10% = 172500

TR , tax rate = 0

Hence EPS under both Plan are equal

EBIT/172500 = (EBIT - 172500)/69000

69000 EBIT = 172500 EBIT - 172500*172500

103500 EBIT = 172500*172500

EBIT = (172500)^2/103500

EBIT = 287500