Question

DAR Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered...

 DAR 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 185,000 shares of stock outstanding. Under Plan II, there would be 135,000 shares of stock outstanding and \$2.7 million in debt outstanding. The interest rate on the debt is 5 percent, and there are no taxes.

 a. If EBIT is \$375,000, 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 \$625,000, 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 \$

 c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)

 Break-even EBIT \$

a) If EBIT is \$375,000, what is the EPS for each plan?

 EPS plan I 2.02 Plan II 1.77

under plan I unlevered company, net income is the same as EBIT with no corporate tax. The EPS under capitalization will be

EPS = \$375,000/185000 shares

= 2.02

under plan II levered company, EBIT will be reduced by interest payment. The EPS under capitalization will be

EPS = \$375,000-0.05(\$2,700,000)

=\$240,000

=\$240,000/135000

=\$1.77

b) If EBIT is \$625,000, what is the EPS for each plan?

 EPS plan I 3.38 Plan II 3.63

under plan I unlevered company, net income is the same as EBIT with no corporate tax. The EPS under capitalization will be

EPS = \$625,000/185000 shares

= 3.38

under plan II levered company, EBIT will be reduced by interest payment. The EPS under capitalization will be

EPS = \$625,000-0.05(\$2,700,000)

=\$490,000

=\$490,000/135000

=\$3.63