Question

3- Destin Corp is comparing three different capital structures. Plan A would result in 10,000 shares of stock and $90,000 in debt. Plan B would result in 7,600 shares of stock and $198,000 in debt. The all equity plan would result in 12,000 shares of stock outstanding. The interest rate on debt is 10%, and the EBIT is $48,000. If Destin Corp has a tax rate of 40%, which of the three plans has the highest EPS?

Answer 1

Calculation Of EPS Plan. A Plan. B Plan. C Shares 10000 Shares Shares 12000 7600 Debt 90000 Debt Debt 198000 0 10% 10% 10% Rate Rate Rate 40% 40% 40% Таx Таx Тах EBIT 48000 ЕBIT 48000 ЕBIT 48000 Interst 9000 Interst 19800 Interst 0 ЕВT 39000 ЕВT 28200 ЕВT 48000 Таx Тах 15600 11280 Таx 19200 Net Net Net 16920 28800 23400 Income Income Income Shares 10000 Shares Shares 12000 7600 EPS 2.34 EPS 2.23 EPS 2.40 Plan C has highest EPS