Question

Coldstream Corp. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $70,000 in debt. Plan II would result in 3,000 shares of stock and $140,000 in debt. The interest rate on the debt is 5 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $60,000. The all-equity plan would result in 15,000 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.)

		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.)

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.)

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

d-3 Assuming that the corporate tax rate is 40 percent, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)

EBIT           $

Answer 1

a. eps

plan I $6.28 {(60000-3500)/9000}

plan II $17.67 {(60000-7000)/3000}

all equity $4 {60000/15000}

b. plan I & all equity = break even ebit=$8750 {breakeven EBIT-3500/9000=BREAKEVEN EBIT/15k}

plan II & all equity= $8750

c. $8750 {ebit-3500/9000=ebit-7000/3000}

d1.

plan 1 eps =3.77 {(60000-3500)*.60//9000}

plan2 eps= 10.60

all equity eps = 2.40

d2. breakeven ebit plan 1 & all equity $8750 {(EBIT-3500)*.60/9000=EBIT*.06/15000}

breakeven ebit plan 2 & all equity $4773 {(EBIT-7000)*.60/3000=EBIT*.06/15000}

d3. $8750 {(ebit-3500)*.06/9000=(ebit-7000)*.60/3000}