Question

Destin Corp. is comparing two different capital structures. Plan I would result in 7,500 shares of stock and $100,000 in debt. Plan II would result in 6,600 shares of stock and $120,000 in debt. The interest rate on the debt is 6 percent.

  

a.	Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $50,000. The all-equity plan would result in 12,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your 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?

  

	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?

  

EBIT

$

  

d-1	Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Round your 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?

  

	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?

  

EBIT

Answer 1