Haskell Corp. is comparing two different capital structures. Plan I would result
ID: 2764027 • Letter: H
Question
Haskell Corp. is comparing two different capital structures. Plan I would result in 16,000 shares of stock and $100,000 in debt. Plan II would result in 13,000 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent.
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.)
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 16,000 shares of stock and $100,000 in debt. Plan II would result in 13,000 shares of stock and $150,000 in debt. The interest rate on the debt is 6 percent.
Explanation / Answer
a) Plan 1
16000 shares +$ 100000 Debt 6% rate of intrest on debt so intrest on 100000*6% =6000
EBIT=$ 90000 EPS = 90000-6000=84000 ., 84000/16000(no of shares)=5.25
Plan 2 13000 shares +$ 150000 shares and intrest on debt =6% and the intrest =150000*6%=$ 9000
EBIT=90000 => EPS= 90000-9000= 81000/13000(no of shares)=6.23
All Equity option = no of shrares 22000 EBIT =90000/22000=4.09
b) Plan 1 and all equity
EPS of plan 1=5.25 intrest on debt =$ 60000 no of shares in all equity=20000
Break even levels of EBIT= Formula = EPS of plan 1 * no of shares of all equity/(1-tax rate)+intrest on debt
5.25*22000/(1-0)+6000
115500/1+6000=$ 121500
Plant 2 and all equity = 6.23*22000/(1-0)+9000= 137060/1+9000=$ 146060
c) EPS of plan 1 and Plan 2 will never be identical because there is difference in DEBT values
d) if tax rate is 40%
EPS of Plan 1 (90000-6000=84000 * (1-.40)=50400/16000=3.15) so EPS of plan 1=3.15
EPS of paln 2 (90000-9000=81000*(1-0.40)=48600/13000=3.74 ) so EPS of plan 2=3.74
EPS all equity =(90000*(1-.40)=54000/22000=2.45 so EPS of plan all equity=2.45
BREAK EVEN LEVELS of each plan=
plan 1 (3.15*22000)/(1-0.4)+6000 =69300/(0.6)+6000=121500
plan 2 (3.74*22000)/(1-0.4)+9000=82280/(0.6)+9000=146133.33
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