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 175,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $1.7 million in debt outstanding. The interest rate on the debt is 5 percent and there are no taxes.

a. If EBIT is $325,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

		EPS
Plan I	$
Plan II	$

b. If EBIT is $575,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

  

		EPS
Plan I	$
Plan II	$

Answer 1

a.

	Plan I	Plan II
EBIT	$ 325,000.00	$ 325,000.00
Less: Interest ($1.7 million*5%)		$ 85,000.00
EBT	$ 325,000.00	$ 240,000.00
Taxes	$ 0.00	$ 0.00
Net income	$ 325,000.00	$ 240,000.00
Number of shares outstanding	175000	125000
EPS	$ 1.86	$ 1.92

b.

	Plan I	Plan II
EBIT	$ 575,000.00	$ 575,000.00
Less: Interest ($1.7 million*5%)		$ 85,000.00
EBT	$ 575,000.00	$ 490,000.00
Taxes	$ 0.00	$ 0.00
Net income	$ 575,000.00	$ 490,000.00
Number of shares outstanding	175000	125000
EPS	$ 3.29	$ 3.92