Question

Destin Corp is comparing two different capital structures Plan I would result in 10.000 shares of stock and $90,000 in debt Plan I would result in 7.600 shares of stock and 5198,000 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)) Plani Plan 11 All equity b. In part (a). What are the break-even levels of EBIT for each plan as compared to that for an all equity plan? Plan I and all-equity Plan Il and all-equity c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? EBIT d.1 Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Round your answers to 2 decimal places.le... 32.16) Plan! Plan il Alquilty d? Assuring that the corporate tax rate is 40 perc

Answer 1

Answer a.

All-equity Plan:

Number of shares outstanding = 12,000

Plan I:

Number of shares outstanding = 10,000
Value of Debt = $90,000

Interest Expense = 10% * $90,000
Interest Expense = $9,000

Plan II:

Number of shares outstanding = 7,600
Value of Debt = $198,000

Interest Expense = 10% * $198,000
Interest Expense = $19,800

Plan All Equity 48,000 $ EBIT Plan II 48,000 19,800 28,200 9,000 $ 39,000 $ 48,000$ Less: Interest Expense EBT Less: Taxes Net Income # of shares EPS 28,200 48,000 $ 12,000 4.00 $ 39,000 $ 10,000 3.90 $ 3.71

Answer b.

Let Breakeven EBIT be $x

All-equity Plan:

EPS = (EBIT - Interest Expense) / Number of shares outstanding
EPS = ($x - $0) / 12,000

Plan I:

EPS = (EBIT - Interest Expense) / Number of shares outstanding
EPS = ($x - $9,000) / 10,000

Plan II:

EPS = (EBIT - Interest Expense) / Number of shares outstanding
EPS = ($x - $19,800) / 7,600

Plan I and All-equity Plan:

EPS under Plan I and EPS under All-equity Plan
($x - $9,000) / 10,000 = ($x - $0) / 12,000
12 * $x - $108,000 = 10 * $x
$x = $54,000

Breakeven EBIT is $54,000

Plan II and All-equity Plan:

EPS under Plan II and EPS under All-equity Plan
($x - $19,800) / 7,600 = ($x - $0) / 12,000
120 * $x - $2,376,000 = 76 * $x
$x = $54,000

Breakeven EBIT is $54,000

Answer c.

Plan I and Plan II:

EPS under Plan I and EPS under Plan II
($x - $9,000) / 10,000 = ($x - $19,800) / 7,600
76 * $x - $684,000 = 100 * $x - $1,980,000
$x = $54,000

Breakeven EBIT is $54,000

Answer d-1.

EBIT Less: Interest Expense EBT Less: Taxes Net Income # of shares EPS All Equity $ 48,000 $ - $ 48,000 $ 19,200 $ 28,800 $ 12,000 2.40 $ Plan 48,000 $ 9,000 $ 39,000 $ 15,600 $ 23,400 $ 10,000 2.34 $ Plan II 48,000 19,800 28,200 11,280 16,920 7,600 2.23

Answer d-2.

Let Breakeven EBIT be $x

All-equity Plan:

EPS = (EBIT - Interest Expense) * (1 - tax) / Number of shares outstanding
EPS = ($x - $0) * (1 - 0.40) / 12,000

Plan I:

EPS = (EBIT - Interest Expense) * (1 - tax) / Number of shares outstanding
EPS = ($x - $9,000) * (1 - 0.40) / 10,000

Plan II:

EPS = (EBIT - Interest Expense) * (1 - tax) / Number of shares outstanding
EPS = ($x - $19,800) * (1 - 0.40) / 7,600

Plan I and All-equity Plan:

EPS under Plan I and EPS under All-equity Plan
($x - $9,000) * 0.60 / 10,000 = ($x - $0) * 0.60 / 12,000
12 * $x - $108,000 = 10 * $x
$x = $54,000

Breakeven EBIT is $54,000

Plan II and All-equity Plan:

EPS under Plan II and EPS under All-equity Plan
($x - $19,800) * 0.60 / 7,600 = ($x - $0) * 0.60 / 12,000
120 * $x - $2,376,000 = 76 * $x
$x = $54,000

Breakeven EBIT is $54,000

Answer d-3.

Plan I and Plan II:

EPS under Plan I and EPS under Plan II
($x - $9,000) * 0.60 / 10,000 = ($x - $19,800) * 0.60 / 7,600
76 * $x - $684,000 = 100 * $x - $1,980,000
$x = $54,000

Breakeven EBIT is $54,000