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 II 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.) EPS 4.736 5.75 4.09 Plan I All equity 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 26,125 Plan II and all-equity 26,125 c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and Il? (Do not round intermediate calculations.) EBIT d-1 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.) EPS Plan I Plan II All equity 2.84 3.45 2.45

Explanation / Answer

a)

2)

c)

d-1

1 2 All equity EBIT 90000 90000 90000 Interest 4750 9500 EBIT- Interest 85250 80500 90000 Now of shares 18000 14000 22000 EPS 4.74 5.75 4.09

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