Question

Kolby Corp. is comparing two different capital structures. Plan I would result in 24,000 shares of stock and $82,500 in debt. Plan II would result in 18,000 shares of stock and $247,500 in debt. The interest rate on the debt is 4 percent.

  

a.	Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $85,000. The all-equity plan would result in 27,000 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 25 percent, what is the EPS for each of the plans? (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 25 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 25 percent, when will EPS be identical for Plans I and II?

Answer 1