Old Structure = 100% Equity
EBIT
20,000
35,000
50,000
Interest
0
0
0
Net Income
20,000
35,000
50,000
New Structure = 75% Equity, 30% Debt
EBIT
20,000
35,000
50,000
Interest
6,300
6,300
6,300
Net Income
13,700
28,700
43,000
Based on the calculations above what would your capital structuring decision be at an EBIT of $50,000? What about $20,000? What is the Break-even EBIT?
| Old Structure = 100% Equity | |||
| EBIT | 20,000 | 35,000 | 50,000 |
| Interest | 0 | 0 | 0 |
| Net Income | 20,000 | 35,000 | 50,000 |
| New Structure = 75% Equity, 30% Debt | |||
| EBIT | 20,000 | 35,000 | 50,000 |
| Interest | 6,300 | 6,300 | 6,300 |
| Net Income | 13,700 | 28,700 | 43,000 |
Based on the calculations above what would your capital structuring decision be at an EBIT of $50,000? What about $20,000? What is the Break-even EBIT?
Related questions
Coldstream Corp. is comparing two different capital structures.Plan I would result in 12,000 shares of stock and $100,000 in debt.Plan II would result in 4,000 shares of stock and $200,000 in debt.The interest rate on the debt is 8 percent.
a. Ignoring taxes, compare both of these plans toan all-equity plan assuming that EBIT will be $70,000. Theall-equity plan would result in 20,000 shares of stock outstanding.What is the EPS for each of these plans? (Do not roundintermediate calculations and round your answers to 2 decimalplaces, e.g., 32.16.)
| EPS | ||
| PlanI | $ | |
| Plan II | $ | |
| All equity | $ | |
b. In part (a), what are the break-even levels of EBIT foreach plan as compared to that for an all-equity plan? (Donot round intermediate calculations.)
| EBIT | |||
| PlanI and all-equity | $ | ||
| Plan II andall-equity | $ | ||
c. Ignoring taxes, at what level of EBIT will EPS beidentical for Plans I and II? (Do not round intermediatecalculations.)
EBIT $
d-1 Assuming that the corporate tax rate is 40 percent,what is the EPS of the firm? (Do not round intermediatecalculations and round your answers to 2 decimal places, e.g.,32.16.)
| EPS | |||
| PlanI | $ | ||
| 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 tothat for an all-equity plan? (Do not round intermediatecalculations.)
| EBIT | ||
| PlanI and all-equity | $ | |
| Plan II andall-equity | $ | |
d-3 Assuming that the corporate tax rate is 40 percent, atwhat level of EBIT will EPS be identical for Plans I and II?(Do not round intermediate calculations.)
EBIT $
| Haskell Corp. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $80,000 in debt. Plan II would result in 7,500 shares of stock and $120,000 in debt. The interest rate on the debt is 8 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? (Do not round intermediate calculations and 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? (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 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 | $ |
