Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2719752 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $370,000 in debt. Plan II would result in 12,100 shares of stock and $329,300 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 $54,700. The all-equity plan would result in 21,000 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).)
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.)
Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
Compute the EPS for each plan. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
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.)
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.)
At what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
Cooke Co. is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $370,000 in debt. Plan II would result in 12,100 shares of stock and $329,300 in debt. The interest rate on the debt is 10 percent.
Explanation / Answer
Plan-1
Plan-2
All Equity Plan
(2)
(a) To Find Breakeven we can use following formula
EBIT-37,000/11,000=EBIT/20,000
EBIT=82,221
(b) EBIT-32,930/12,100=EBIT/20,000
EBIT=83,367
Requirement -3
EBIT-37,000/11,000=EBIT-32,930/12,100
1.1EBIT-40,700=EBIT-32930
0.1 EBIT=40,700-32,930
EBIT=77,700
Requirement -4
Plan -1
EBIT= $54,700
Interest ($37,000)
EBT = 17,700
TAx= = 5,310
EAT= 12,390
EPS= 1.13
Plan-II
EBIT 54,700
Interest 32930
EBT 21,770
Tax 6531
EAT= 15,239
EPS=1.26
For All Equity Plan
EBIT 54,700
Tax 16,410
EAT= 38,290
EPS=1.9145
(b) at EBIT of 82,229 EPS will be same for plan 1 and all equity plan
(c) At EBIT of$83,370 EPS will be same for Plan 2 and all equity plan
(d) AT EBIT of $77,700 EPS will be same for Plan 1 and Plan 2
Amount EBIT $54,700 Interest($3,70,000*10%) $37,000 EBT $17,700 Equity Shares Outstanding 11,000 EPS 1.61