Hale Corporation is comparing two different capital structures, an all-equity pl
ID: 2803637 • Letter: H
Question
Hale Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 165,000 shares of stock outstanding. Under Plan II, there would be 115,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.
a. If EBIT is $600,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
b. If EBIT is $850,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Break-even EBIT $
Explanation / Answer
a)
EPS for plan 1 = EBIT / Number of shares = (600,000/ 165000)= 600,000 / 165,000 =3.63
EPS for Plan 2 =EBIT - Interest/Number of shares O/s = (600,000-120,000)/ 115,000= 4.17
b)
EPS for plan1 = (850,000) /165,000 = 5.15
EPS for plan 2 = (850,000- 120,000)/115,000 = 6.34
c)
For Break even EBIT,
EBIT/ 165000 = (EBIT - 120,000)/115000
115/165 EBIT = EBIT-120000
120000= 10/33* EBIT
Break even EBIT = $ 396,000
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.