Question

Silverton Co. is comparing two different capital structures. Plan I would result in 8,500 shares of stock and $402,500 in debt. Plan II would result in 12,000 shares of stock and $280,000 in debt. The interest rate on the debt is 11 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $54,500. The all-equity plan would result in 20,000 shares of stock outstanding. Compute 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	$
All-equity plan	$

b. In part (a), what is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

In part (a), what is the break-even level of EBIT for Plan II as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

d. Assume the corporate tax rate is 34 percent.

Compute 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	$
All-equity plan	$

What is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

What is the break-even level of EBIT for Plan II as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

At what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT            $

Answer 1

a.

b. In part (a), what is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Plan I EBIT = All equity Plan EBIT

(EBIT - Interest) / Shares O/s =  (EBIT ) / Shares O/s

(EBIT - 44275) / 8500 =  (EBIT ) / 20000

20000 * EBIT - 44275 * 20000 = 8500 EBIT

EBIT = $77000

In part (a), what is the break-even level of EBIT for Plan II as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Plan II EBIT = All equity Plan EBIT

(EBIT - Interest) / Shares O/s =  (EBIT ) / Shares O/s

(EBIT - 30800) / 12000 =  (EBIT ) / 20000

20000 * EBIT - 30800 * 20000 = 12000 * EBIT

EBIT = $77000

c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Plan I EBIT = Plan II EBIT

(EBIT - Interest) / Shares O/s = (EBIT - Interest) / Shares O/s

(EBIT - 44275) / 8500 = (EBIT - 30800) / 12000

12000 * EBIT - 531300000 = 8500 * EBIT - 261800000

EBIT = $77000

d

What is the break-even level of EBIT for Plan I as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT = $77000

What is the break-even level of EBIT for Plan II as compared to that for an all-equity plan? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT = $77000

At what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

EBIT = $77000

the reason behind same EBIT is that the capital structure is correctly aligned by maintaining debt and equity at same level thus EBIT for all breakevens are $77000

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