Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2719778 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $306,000 in debt. Plan II would result in 12,150 shares of stock and $198,900 in debt. The interest rate on the debt is 10 percent. Round to two decimal points.
a) Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $54,400. The all-equity plan would result in 18,000 shares of stock outstanding. Compute the EPS for each plan.
b) In a), what is the break-even level of EBIT for Plan I as compared to that for an all-equity plan?
c) In a), what is the break-even level of EBIT for Plan II as compared to that for an all-equity plan?
d) Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?
e) Assume the corporate tax rate is 32 percent, Compute EPS for each Plan and also All Equity Plan
f) What is the break-even level of EBIT for Plan I as compared to that for an all-equity plan?
g) What is the break-even level of EBIT for Plan II as compared to that for an all-equity plan?
h) At what level of EBIT will EPS be identical for Plans I and II?
Explanation / Answer
Cooke Co. is comparing two different capital structures. Plan I would result in