Question

Kolby Corp. is comparing two different capital structures. Plan I would result in 14,000 shares of stock and $95,000 in debt. Plan II would result in 8,000 shares of stock and $190,000 in debt. The interest rate on the debt is 9 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $80,000. The all-equity plan would result in 20,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your final 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 final 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, when will EPS be identical for Plans I and II? (Do not round intermediate calculations.) EBIT $______

Answer 1