Question

Kolby Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of...

Kolby Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $100,000 in debt. Plan II would result in 4,000 shares of stock and $200,000 in debt. The interest rate on the debt is 8 percent.

  

a.

Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $70,000. The all-equity plan would result in 20,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

EPS
  Plan I $
  Plan II $
  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? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

  

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 II? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

  EBIT $

  

d-1.

Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

EPS
  Plan I $
  Plan II $
  All equity $

  

d-2.

Assuming that the corporate tax rate is 40 percent, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.)

  

EBIT
  Plan I and all-equity $
  Plan II and all-equity $

  

d-3.

Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

  

  EBIT $

Homework Answers

Answer #1

ANSWER:a

PLAN 1 PLAN 2 ALL EQUITY
EBIT 70,000 70000 70000
less : Interest (8000) (16000) -
EBT(A) 62000 54000 70000
No of shares (B) 12000 4000 20000
EPS(A/B) 5.17 13.50 3.50

Note: interest @ 8% has been taken on debenture amount for calculation of interest .

Above solution is before considering taxes hece EBT has been divided to no of shares for calculation of EPS because EAT (earning after tax) & earning before tax will be same as taxes have to be ignored.

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