Haskell Corp. is comparing two different capital structures. Plan I would result
ID: 2761986 • Letter: H
Question
Haskell 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 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 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.)
Haskell 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
EPS = Funds attributable to Equity share holders/Number of equity shares outstanding EPS = EBIT-Interest and tax/Number of equity shares outstanding Funds attributable to Equity share holders EBIT-Interest Plan I : $70000-$100000*5% = $65,000 Plan II : $70000-$170000*5% = $61,500 All equity $70000-0 = $70,000 a. EPS Plan I $65000/15000 Shares $4.33 Plan II $61500/11500 Shares $5.35 All equity $70,000/20000 Shares $3.50 b. EBIT Plan I and all-equity See Working below $20,000.00 Plan II and all-equity See Working below $20,000.00 For breakeven EBIT, EPS under both the plans will be same. Plan I and all-equity (EBIT-$5000)/15,000 = (EBIT-0)/20,000 20 EBIT-$100,000 = 15 EBIT 5 EBIT = $100000 EBIT = $20,000 Plan II and all-equity (EBIT-$8500)/11500 = (EBIT-0)/20,000 (EBIT-$8500)*1.73913 = EBIT 1.73913EBIT-$14,782.60 = EBIT 0.73913EBIT=$14,782.60 EBIT = $20,000 c. EBIT $20,000.00 Plan I and Plan II (EBIT-$5000)/15,000 = (EBIT-$8500)/11500 EBIT-$5000 = (EBIT-$8500)*1.3043 EBIT-$5000 = 1.3043 EBIT-11086.957 0.3035 EBIT = $6086.96 EBIT = $20,000 Therefore, at EBIT $20,000 EPS under both plans will be identical Funds attributable to Equity share holders EBIT-Interest Plan I : ($70000-$100000*5%) *(1-0.40)= $39000 Plan II : ($70000-$170000*5%) *(1-0.40) = $36900 All equity ($70000-0)*(1-0.40) = $42000 d-1 EPS Plan I $39000/15000 Shares $2.60 Plan II $36900/11500 Shares $3.21 All equity $42000/20000 Shares $2.10 d-2 EBIT Plan I and all-equity $20,000.00 Plan II and all-equity $20,000.00 For breakeven EBIT, EPS under both the plans will be same. Since, Taxes will not make any impact, as it will be cancelled out from both the sides d-3 EBIT $20,000.00 This also will not change
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