Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2384386 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 8,500 shares of stock and $361,000 in debt. Plan II would result in 12,000 shares of stock and $228,000 in debt. The interest rate on the debt is 10 percent.
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $61,000. The all-equity plan would result in 18,000 shares of stock outstanding. Compute the EPS for each plan.
In Requirement (1), 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.)
In Requirement (1), 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.)
Compute the EPS for each plan.
Cooke Co. is comparing two different capital structures. Plan I would result in 8,500 shares of stock and $361,000 in debt. Plan II would result in 12,000 shares of stock and $228,000 in debt. The interest rate on the debt is 10 percent.
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $61,000. The all-equity plan would result in 18,000 shares of stock outstanding. Compute the EPS for each plan.
EPS Plan I $ Plan II $ All-equity plan $ Requirement 2: (a)In Requirement (1), 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.)
EBIT $ (b)In Requirement (1), 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.)
EBIT $Assume the corporate tax rate is 35 percent. (a)
Compute the EPS for each plan.
EPS Plan I $ Plan II $ All-equity plan $Explanation / Answer
PArt 2
Breakeven level EBIT for plan 1:
(EBIT-$36,100-$8,715)÷8,500=1.90
EBIT =$60,965
Breakeven level EBIT for plan 2:
(EBIT-$22,800-$13,370)÷12,000=2.07
EBIT =$61,010
Plan 1 Plan 2 All equity Plan EBIT 61,000.00 61,000.00 61,000.00 Less: Interest @10% 36,100.00 22,800.00 - Net income 24,900.00 38,200.00 61,000.00 No of shares 8,500 12,000 18,000 EPS 2.93 3.18 3.39