Coldstream Corp. is comparing two different capital structures. Plan I would res
ID: 2396556 • Letter: C
Question
Coldstream 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? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
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.)
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.)
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.)
d-3 Assuming that the corporate tax rate is 40 percent, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
EBIT $
Explanation / Answer
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a Plan 1 Plan 2 All Equity EBIT $ 50,000 $ 50,000 $ 50,000 Interest on Debt(100000*6% )(120000*6%) $ 6,000 $ 7,200 $ - Profit Before Tax $ 44,000 $ 42,800 $ 50,000 No. of Shares $ 7,500 $ 6,600 $ 12,000 EPS $ 5.87 $ 6.48 $ 4.17