Question

Bellwood Corp. is comparing two different capital structures. Plan I would result in 22,000 shares of stock and $79,500 in debt. Plan II would result in 16,000 shares of stock and $238,500 in debt. The interest rate on the debt is 6 percent.

  

a.	Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $75,000. The all-equity plan would result in 25,000 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.)
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.)
c.	Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
d-1.	Assuming that the corporate tax rate is 23 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.)
d-2.	Assuming that the corporate tax rate is 23 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.)
d-3.	Assuming that the corporate tax rate is 23 percent, when will EPS be identical for Plans I and II? (Do not round intermediate calculations.)

Answer 1

1.
Plan I=(75000-79500*6%)/22000=3.19227272727273

2.
Plan II=(75000-238500*6%)/16000=3.793125

3.
All equity=(75000)/25000=3.00

4.
Plan I with all equity=(79500*6%/22000)/(1/22000-1/25000)=39750.00

5.
Plan II with all equity=(238500*6%/16000)/(1/16000-1/25000)=39750.00

6.
Plan I with Plan II=(79500*6%/22000-238500*6%/16000)/(1/22000-1/16000)=39750.00

7.
Plan I=(75000-79500*6%)*(1-23%)/22000=2.45805

8.
Plan II=(75000-238500*6%)*(1-23%)/16000=2.92070625

9.
All equity=(75000)*(1-23%)/25000=2.31

10.
Plan I with all equity=(79500*6%/22000)/(1/22000-1/25000)=39750.00

11.
Plan II with all equity=(238500*6%/16000)/(1/16000-1/25000)=39750.00

12.
Plan I with Plan II=(79500*6%/22000-238500*6%/16000)/(1/22000-1/16000)=39750.00