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

Question

Haskell Corp. is comparing two different capital structures. Plan I would result in 18,000 shares of stock and $95,000 in debt. Plan I would result in 14,000 shares of stock and $190,000 in debt. The interest rate on the debt is 5 percent. a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $90,000 The all-equity plan would result in 22,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Plan I Plan II All equity EPS $4.736 $5.75 $ 4.0909 b. 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.) EBIT Plan I and all-equity Plan Il and all-equity c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and ? (Do not round intermediate calculations.) EBIT

Explanation / Answer

b.

Break even EBIT plan 1

(EBIT-debt*interest rate)/shares outstanding plan 1

=

(EBIT)/all equity

(EBIT-95000*0.05)/18000 =(EBIT)/22000

EBIT = 26125

Break even EBIT plan 2

(EBIT-debt*interest rate)/shares outstanding plan 2

=

(EBIT)*/all equity

(EBIT-190000*0.05)/14000 =(EBIT)/22000

EBIT = 26125

c

(EBIT-190000*0.05)/14000 = (EBIT-95000*0.05)/18000

EBIT = 26125

D1

EPS plan 1

=(EBIT-debt*interest rate)*(1-tax rate)/shares outstanding

=(90000-95000*0.05)*(1-0.4)/18000=2.84

EPS plan 2

=(EBIT-debt*interest rate)*(1-tax rate)/shares outstanding

=(90000-190000*0.05)*(1-0.4)/14000=3.45

EPS all equity

=(EBIT)*(1-tax rate)/shares outstanding

=(90000)*(1-0.4)/22000 = 2.45

D2

Break even EBIT plan 1

(EBIT-debt*interest rate)*(1-tax rate)/shares outstanding plan 1

=

(EBIT)*(1-tax rate)/all equity

(EBIT-95000*0.05)*(1-0.4)/18000=(EBIT)*(1-0.4)/22000

EBIT = 26125

Break even EBIT plan 2

(EBIT-debt*interest rate)*(1-tax rate)/shares outstanding plan 1

=

(EBIT)*(1-tax rate)/all equity

(EBIT-190000*0.05)*(1-0.4)/14000=( EBIT)*(1-0.4)/22000

EBIT = 26125

D3

(EBIT-190000*0.05)*(1-0.4)/14000 = (EBIT-95000*0.05)*(1-0.4)/18000

EBIT = 26125

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