Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2502122 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $310,000 in debt. Plan II would result in 13,000 shares of stock and $217,000 in debt. The interest rate on the debt is 10 percent.
Requirement 1:
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $54,100. The all-equity plan would result in 20,000 shares of stock outstanding. Compute the EPS for each plan. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
EPS
Plan I $ 2.31
Plan II $2.49
All-equity plan $2.71
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 $
Requirement 3:
Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
EBIT $
Requirement 4:
Assume the corporate tax rate is 34 percent.
(a)
Compute the EPS for each plan. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
EPS
Plan I $
Plan II $
All-equity plan $
(b)
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 $
(c)
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 $
(d)
At what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
EBIT $
Explanation / Answer
(EPS * Number of Common Shares Outstanding) + Preferred Share Dividends / (1 - Tax Rate) + Debt Interest
1-------- -1-----23419.91
2----21726.90
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