Question

Silverton Co. is comparing two different capital structures. Plan I would result in 8,500 shares of stock and $402,500 in debt. Plan II would result in 12,000 shares of stock and $280,000 in debt. The interest rate on the debt is 11 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $54,500. The all-equity plan would result in 20,000 shares of stock outstanding. Compute the EPS for each plan. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	EPS
Plan I	$
Plan II	$
All-equity plan	$

b. In part (a), what is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

In part (a), what is the break-even level of EBIT for Plan II as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

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. Assume the corporate tax rate is 34 percent.

Compute the EPS for each plan. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

	EPS
Plan I	$
Plan II	$
All-equity plan	$

What is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

What is the break-even level of EBIT for Plan II as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

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            $

Answer 1

1.
=(54500-402500*11%)/8500=1.20294117647059

2.
=(54500-280000*11%)/12000=1.975

3.
=(54500)/20000=2.725

4.
=(402500*11%)/(1-8500/20000)=77000

5.
=(280000*11%)/(1-1200/20000)=32765.9574468085

6.
=(12000*402500*11%-8500*280000*11%)/(12000-8500)=77000

7.
=(54500-402500*11%)*(1-34%)/8500=0.793941176470588

8.
=(54500-280000*11%)*(1-34%)/12000=1.3035

9.
=(54500)*(1-34%)/20000=1.7985

10.
=(402500*11%)/(1-8500/20000)=77000

11.
=(280000*11%)/(1-1200/20000)=32765.9574468085

12.
=(12000*402500*11%-8500*280000*11%)/(12000-8500)=77000