Question

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

$

Answer 1

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