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 14,000 shares of stock and $100,000 in debt. Plan II would result in 10,800 shares of stock and $180,000 in debt. The interest rate on the debt is 8 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 18,000 shares of stock outstanding. What is the EPS for each of these plans?

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?

1) Plan 1 and all equity= (EBIT)

2) Plan 2 and all equity= (EBIT)

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?

1) Plan 1 and all equity= (EBIT)

2) Plan 2 and all equity= (EBIT)

Explanation / Answer

EBIT = 90000

Plan 1

Interest = 8%*100000 = 8000

Net income = 90000 - 8000 = 82000

EPS = 82000 / 14000 = 5.86

Plan 2

Interest = 8%*180000 = 14400

Net income = 90000 - 14400 = 75600

EPS = 75600 / 10800 = 7

All equity

EPS = 90000 / 18000 = 5

2)

Plan 1

EBIT*(1-40%) / 18000 = (EBIT - 8%*100000)*(1-40%) / 14000

14000*EBIT = 18000*EBIT - 144000000

EBIT = 144000000 / 4000 = 36000

Plan 2

EBIT*(1-40%) / 18000 = (EBIT - 8%*180000)*(1-40%) / 10800

10800*EBIT = 18000*EBIT - 259200000

EBIT = 259200000 / 7200 = 36000

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.