Silverton Co. is comparing two difierent capital structuros. Plan Iwould rosult

Question

Silverton Co. is comparing two difierent capital structuros. Plan Iwould rosult in 8,000 sharos of stock and $410,400 in dobt. Plan II would result in 12,450 sharos of stock and $250,200 in dobt. The intorest rate on the debt is 10 percent Tho intoreat rato dobt is 10 percent a. Ignoring taxes, compare both of these plans to an all-oquity plan assuming that EBIT will be $63,300. Tho all-equity plan would rosult in 19,400 shares of stock outstanding. Compute the EPS for onch plan. (Do not round intermediate calculations and round your answors to 2 decimal places e.g., 32.16) EPS Plan I Plan II All-equity plan b. In part (a), what is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g, 32) EBIT In part a). what the break even level of EBIT for Plan as compared to that or an al equity plan? Do not round intermodiato calculations and round your ans or to the nearest whole number, o.g. 32. EBIT c. Ignoring taxes, at what level of EBIT wil EPS be identical for Plans I and i? (Do not round intermediate caiculations and round your answer to the nearest whole number, e.g.. 32.) EBIT d. Assume the corporate tax rato is 34 peroont Computo tho EPS for each plan (Do not round intormediate calculations and round your answers to 2 decimal placos, o.g, 32.16) EPS Plan I Plan II All-equity plan S What is the breaven level of EBIT for Panl as compared to tat for Do not round intermediate calculations and round your answer to the nearest whole number, e g 32 ESIT What is the break-even level of EBIT for Plan Il as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32) EBIT At it at evel of EBIT will EPS be identical for Plans and m?Do not round intermediate calculations and round your answer to the nearest whole nu er eg, 32.) an all-equity plan?

Explanation / Answer

As per policy, only four parts of a question is allowed to answer, so answering a - d,

(a) the break-even level of EBIT for Plan I as compared to that for an all-equity plan : Let the EBIT be x.

=> x / 19400 = [x - (410400 * 10%) ] / 8000

solving for x, we get

x = EBIT = $69840

(b) the break-even level of EBIT for Plan II as compared to that for an all-equity plan : Let the EBIT be x.

=> x / 19400 = [x - (250200 * 10%) ] / 12450

solving for x, we get

x = EBIT = $69840

c) Let EBIT = x, level of EBIT will EPS be identical for Plans I and II = x - 41040 / 8000 = x - 25020 / 12450

solving for x, we get,

x = Level of EBIT = $69804

d) Plan 1 = [53300 - (410400 * 10%) ] * (1 - 0.34)/ 8000 = EPS = $1.01

Plan II = [53300 - (250200 * 10%) ] * (1 - 0.34)/ 12450 = EPS = $1.50

All Equity = 53300 * (1 - 0.34) / 19400 = EPS = $1.81

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