Question

Yasmin Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Yasmin would have 180,000 shares of stock outstanding. Under Plan II, there would be 130,000 shares of stock outstanding and $1.8 million in debt outstanding. The interest rate on the debt is 6 percent and there are no taxes.

a.	If EBIT is $225,000, what is the EPS for each plan? (Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16).)

	EPS
Plan I	$
Plan II	$

b.	If EBIT is $475,000, what is the EPS for each plan? (Do not round intermediate calculations and round your final 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) The EPS for each plan is calculated as follows:

	Plan I	Plan II
Earning before interest and tax (EBIT)	225,000	225,000
Less: Interest Expenses (1,800,000 * 6%)	108,000	108,000
Net Income before tax	117,000	117,000
Income Tax	-	-
Net Income	$117,000	$117,000

EPS = (Net Income - Preferred Dividend) / Number of outstanding common shares

Plan I = ($117,000 - $0) / 180,000 shares

          = 117,000 / 180,000 shares

        = $0.65 Per Share

Plan II = ($117,000 - $0) / 130,000 shares

       = 117,000 / 130,000 shares

        = $0.90 Per Share

b) The EPS for each plan is calculated as follows:

	Plan I	Plan II
Earning before interest and tax (EBIT)	475,000	475,000
Less: Interest Expenses (1,800,000 * 6%)	108,000	108,000
Net Income before tax	367,000	367,000
Income Tax	-	-
Net Income	$367,000	$367,000

EPS = (Net Income - Preferred Dividend) / Number of outstanding common shares

Plan I = ($367,000 - $0) / 180,000 shares

          = 367,000 / 180,000 shares

        = $2.04 Per Share

Plan II = ($367,000 - $0) / 130,000 shares

       = 367,000 / 130,000 shares

        = $2.82 Per Share

c) The break-even EBIT is calculated as follows:

EPS = (EBIT - Interest ) / Number of shares outstanding

2.04 = (EBIT - 108,000) / 180,000 Shares

2.04 * 180,000 = EBIT - 108,000

367,200 = EBIT - 108,000

EBIT   = 367,200 + 108,000

EBIT    = $475,200