Blue Stripes Co. is comparing two different capital structures. Plan I would res
ID: 2698287 • Letter: B
Question
Blue Stripes Co. is comparing two different capital structures. Plan I would result in 8,700 shares of stock and $323,000 in debt. Plan II would result in 12,000 shares of stock and $210,800 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 $53,100. The all-equity plan would result in 18,200 shares of stock outstanding. Compute the EPS for each plan. (Do not include the dollar signs ($). Round your answers to 2 decimal places (e.g., 32.16).)
Requirement 2:
(a)
In req. (1), what is the break-even level of EBIT for Plan IÂ as compared to that for an all-equity plan? (Do not include the dollar sign ($).)
(b)
In req. (1), what is the break-even level of EBIT for Plan IIÂ as compared to that for an all-equity plan? (Do not include the dollar sign ($).)
Requirement 3:
Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not include the dollar sign ($).)
Requirement 4:
Assume the corporate tax rate is 30 percent.
(a)
Compute the EPS for each plan. (Do not include the dollar signs ($). Round your answers to 2 decimal places (e.g., 32.16).)
(b)
What is the break-even level of EBIT for Plan IÂ as compared to that for an all-equity plan? (Do not include the dollar sign ($).)
(c)
What is the break-even level of EBIT for Plan IIÂ as compared to that for an all-equity plan? (Do not include the dollar sign ($).)
(d)
At what level of EBIT will EPS be identical for Plans I and II? (Do not include the dollar sign ($).)
Requirement 1:
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $53,100. The all-equity plan would result in 18,200 shares of stock outstanding. Compute the EPS for each plan. (Do not include the dollar signs ($). Round your answers to 2 decimal places (e.g., 32.16).)
Requirement 2:
Explanation / Answer
requirement 1
plan 1
EBIT = 53100
intrest = 10% * 323000 = 32300
net income = 53100 - 32300 = 20800
EPS = 20800 / 8700 = 2.39
plan 2:
EBIT = 53100
intrest = 10% * 210800 = 21080
net income = 53100 - 21080 = 32020
EPS = 32020/ 12000 = 2.67
ALL equityplan:
EPS = 53100/18200 = 2.92
requirement 2:
break evenEBITbetween plan 1 and allequity
EBIT/18200 = (EBIT- 10% *323000) / 8700
8700 EBIT = 18200 EBIT - 587860000
hence break -even EBIT = 61880
break evenEBITbetween plan 2 and allequity
EBIT/18200 = (EBIT- 10% *210800) / 12000
12000 EBIT = 18200 EBIT - 383656000
hence break -even EBIT = 61880
requirement 3:
setting EPS forplan 1 and plan 2 equal