Need help with d-2 and d-3 Destin Corp. is comparing two different capital struc

Question

Need help with d-2 and d-3

Destin 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? (Round your answers to 2 decimal places. (e.g., 32.16)) EPS Plan I Plan II All equity 4.74 5.75 4.10 b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? EBIT Plan I and all-equity Plan Il and all-equity 26125 26125 c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and 11? EBIT 26125

Explanation / Answer

d-2

EPS equation can be framed as ........( EBIT - I) (1-TR) / N

EBIT = Earnings before interest and taxes

I = Interest

TR = Tax rate

N = Number of shares

Plan - 1 ................(EBIT - 4750) ( 0.60) / 18000

All equity ............( EBIT ) (0.60) / 22000

EBIT - 4750) ( 0.60) / 18000 = ( EBIT ) (0.60) / 22000

EBIT - 4750 = EBIT * 18/22

EBIT * 4/22 = 4750

EBIT = 26125....................................final answer

Plan - II and all equity

Plan - II................(EBIT - 9500) ( 0.60) / 14000

All equity ............( EBIT ) (0.60) / 22000

EBIT - 9500) ( 0.60) / 14000 = ( EBIT ) (0.60) / 22000

EBIT - 9500 = EBIT * 14/22

EBIT * 8/22 = 9500

EBIT = 26125 ............final answer

D-3

Plan - I ................(EBIT - 4750) ( 0.60) / 18000

Plan - II................(EBIT - 9500) ( 0.60) / 14000

(EBIT - 4750) ( 0.60) / 18000 = (EBIT - 9500) ( 0.60) / 14000

14 ( EBIT - 4750) = 18(EBIT - 9500)

4 EBIT = 104500

EBIT = 26125..........final answer

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