Destin Corp. is comparing two different capital structures. Plan I would result

Question

Destin Corp. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $80,000 in debt. Plan Il would result in 7,500 shares of stock and $120,000 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 $50,000 The all-equity plan would result in 12,000 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 $ 4.84 $5.38 $ 4.17 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? EBI Plan I and all-equity Plan Il and all-equity c. lgnoring taxes, at what level of EBIT will EPS be identical for Plans I and II? EBIT d-1 Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Round your answers to 2 decimal places. (e.g., 32.16)) EPS Plan I Plan II All equity d-2 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? EBIT Plan I and all-equity Plan Il and all-equity d-3 Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and l1? EBIT

Explanation / Answer

a
Plan 1 EPS=(50000-80000*8%)/9000=4.844
Plan 2 EPS=(50000-120000*8%)/7500=5.3867
All equity EPS=50000/12000=4.167

b
Plan 1 and all equity eps to be the same..Let EBIT be x
=>(x-80000*8%)/9000=x/12000
=>x=80000*4*8%=25600

Plan 2 and all equity eps to be the same
=>(x-120000*8%)/7500=x/12000
=>x=120000*8/3*8%=25600

c
Let EBIT be x
plan 1 and plan 2 eps be the same
=>(x-80000*8%)/9000=(x-120000*8%)/7500
=>x/9000-6400/9000=x/7500-9600/7500
=>x/45000=9600/7500-6400/9000
=>x=9600*6-6400*5=25600

d1
Plan 1 EPS=(50000-80000*8%)*(1-40%)/9000=2.9067
Plan 2 EPS=(50000-120000*8%)*(1-40%)/7500=3.232
All equity EPS=50000*(1-40%)/12000=2.5

d2
Plan 1 and all equity eps to be the same..Let EBIT be x
=>(x-80000*8%)*(1-40%)/9000=x*(1-40%)/12000
=>x=80000*4*8%=25600

Plan 2 and all equity eps to be the same
=>(x-120000*8%)*(1-40%)/7500=x*(1-40%)/12000
=>x=120000*8/3*8%=25600

d3
Let EBIT be x
plan 1 and plan 2 eps be the same
=>(x-80000*8%)*(1-40%)/9000=(x-120000*8%)*(1-40%)/7500
=>x/9000-6400/9000=x/7500-9600/7500
=>x/45000=9600/7500-6400/9000
=>x=9600*6-6400*5=25600

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