6. value 071 points Destin Corp. is comparing two different capital structures.
ID: 2801234 • Letter: 6
Question
6. value 071 points Destin Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $90,000 in debt. Plan II would result in 7,600 shares of stock and $198,000 in debt. The interest rate on the debt is 10 percent a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $48,000 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 Plan I Plan II All equity b. In part (e), 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 II and all-equity c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and l12 EBIT d-1 Assuming that the corporate tax rate is 40 nercent what ie the Eno .Explanation / Answer
a. Calculation of EPS:
Particulars
Plan 1
Plan 2
All Equity
EBIT
48000
48000
48000
Interest (Debt*10%)
-9000
-19800
0
Net Earning
39000
28200
48000
No. of shares
10000
7600
12000
EPS (Net Earning/No. of shares
3.9
3.71
4
b. Calculation of break even EBIT:
Plan 1 with all equity:
EPS = (EBIT - Debt Interest)/ No, of shares
4 = (EBIT-9000)/ 10000
4*10000= EBIT-9000
EBIT= 40000+9000= 49000/-
Plan 2 With All equity plan:
EPS = (EBIT - Debt Interest)/ No, of shares
4 = (EBIT-19800)/ 7600
4*7600= EBIT-19800
EBIT= 30400+19800= 50200/-
c. Identical EBIT of Plan 1 & 2:
EPS Plan1 = EPS Plan2
(EBIT-9000)/10000 = (EBIT-19800)/7600
7600 EBIT - 68400000 = 10000EBIT – 198000000
2400 EBIT = 129600000
EBIT = 129600000/2400
EBIT= 54000
d -1. EPS if there is tax @ 40%
Particulars
Plan 1
Plan 2
All Equity
EBIT
48000
48000
48000
Interest (Debt*10%)
-9000
-19800
0
EBT
39000
28200
48000
Tax @ 40%
-15600
-11280
-19200
EAT
23400
16920
28800
No. of shares
10000
7600
12000
EPS (EAT/NO. of shares)
2.34
2.23
2.4
d-2 Bresk even EBIT
Plan1 with all equity plan:
EPS = (EBIT - Debt Interest) * (1 - Tax Rate) / No. of shares
2.4 = (EBIT-9000)* (1-.4) /10000
24000= .6EBIT-5400
EBIT = 24000+5400/.6
EBIT=29400/.6 = 49000
Plan1 with all equity plan:
EPS = (EBIT - Debt Interest) * (1 - Tax Rate) / No. of shares
2.4 = (EBIT-19800)* (1-.4) /7600
18240= .6EBIT-11880
EBIT = 18240+11880/.6
EBIT=30120/.6 = 50200
d-3 EBIT at identical EPS plan 1& 2
EPS plan 1 = EPS Plan 2
{(EBIT-9000)*(1-.4)}/10000 = {(EBIT-19800)*(1-.4)}/7600
(.6 EBIT-5400)/10000= (.6 EBIT-11880)/7600
4560 EBIT – 41040000 = 6000 EBIT – 118800000
1440 EBIT = 77760000
EBIT = 77760000/1440 = 54000
Thanks
Particulars
Plan 1
Plan 2
All Equity
EBIT
48000
48000
48000
Interest (Debt*10%)
-9000
-19800
0
Net Earning
39000
28200
48000
No. of shares
10000
7600
12000
EPS (Net Earning/No. of shares
3.9
3.71
4
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