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 13,000 shares of stock and $100,000 in debt. Plan II would result in 10,500 shares of stock and $150,000 in debt. The interest rate on the debt is 10 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 18,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16))

In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?

Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?

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))

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?

Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II?

Destin Corp. is comparing two different capital structures. Plan I would result in 13,000 shares of stock and $100,000 in debt. Plan II would result in 10,500 shares of stock and $150,000 in debt. The interest rate on the debt is 10 percent.

Explanation / Answer

a
Eps for all equity=90000/18000=5
Eps for plan 1=(90000-100000*10%)/13000=6.153846
Eps for plan 2=(90000-150000*10%)/10500=7.142857

b
Plan 1 and all equity EPS same
ebit/18000=(ebit-100000*10%)/13000
=>ebit=36000

Plan 2 and all equity EPS same
ebit/18000=(ebit-150000*10%)/10500
=>ebit=36000

c
eps to be identical
(ebit-100000*10%)/13000=(ebit-150000*10%)/10500
=>ebit=36000

d1
Eps for all equity=90000/18000*(1-40%)=3
Eps for plan 1=(90000-100000*10%)/13000*(1-40%)=3.69
Eps for plan 2=(90000-150000*10%)/10500*(1-40%)=4.29

d2
Plan 1 and all equity EPS same
ebit*(1-40%)/18000=(ebit-100000*10%)*(1-40%)/13000
=>ebit=36000

Plan 2 and all equity EPS same
ebit/18000*(1-40%)=(ebit-150000*10%)*(1-40%)/10500
=>ebit=36000

d3
eps to be identical
(ebit-100000*10%)*(1-40%)/13000=(ebit-150000*10%)*(1-40%)/10500
=>ebit=36000

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