Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2720323 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 10,500 shares of stock and $296,000 in debt. Plan II would result in 12,500 shares of stock and $222,000 in debt. The interest rate on the debt is 9 percent.
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $53,400. The all-equity plan would result in 18,500 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 10,500 shares of stock and $296,000 in debt. Plan II would result in 12,500 shares of stock and $222,000 in debt. The interest rate on the debt is 9 percent.
Explanation / Answer
SOLUTION :
Plan I
Plan II
shares
10500
12500
Debt
296000
222000
1
EBIT
53400
53400
Less : interest
26640
19980
EBT
26760
33420
NO SHARES
10500
12500
EPS
2.55
2.67
2a
break-even level of EBIT
PLAN 1
ALL EQUITY
EBIT(EBT+INTEREST)
71,116.22
53,400.00
Less : interest
40,808.11
-
EBT (EPSXNO OF SHARE)
30,308.11
53,400.00
NO SHARES
10,500.00
18,500.00
EPS
2.89
2.89
2b
break-even level of EBIT
PLAN ii
ALL EQUITY
EBIT(EBT+INTEREST)
84,662.16
53,400.00
Less : interest
48,581.08
-
EBT (EPSXNO OF SHARE)
36,081.08
53,400.00
NO SHARES
12,500.00
18,500.00
EPS
2.89
2.89
3
level of EBIT will EPS be identical for Plans I and II
let a be the that EBIT level
(a -26640)/10500 = (a - 19980)/12500
125a - 3330000=105a - 2097900
a = 61605
4a
EPS
Plan I
Plan ii
EBIT
53,400.00
53,400.00
Less : interest
26,640.00
19,980.00
EBT
26,760.00
33,420.00
Less :TAX "35%
9,366.00
11,697.00
EAT
17,394.00
21,723.00
NO SHARES
10,500.00
12,500.00
EPS
1.66
1.74
4b
break-even level of EBIT for Plan I as compared to that for an all-equity plan
Plan I
All-equity plan
EBIT (EBT + INTEREST)
56,948.11
53,400.00
Less : interest
26,640.00
-
EBT (EAT/65%)
30,308.11
53,400.00
Less :TAX "35%
10,607.84
18,690.00
EAT (EPS X NO OF SHARE)
19,700.27
34,710.00
NO SHARES
10,500.00
18,500.00
EPS
1.88
1.88
4c
break-even level of EBIT for Plan II as compared to that for an all-equity plan
Plan ii
All-equity plan
EBIT (EBT + INTEREST)
56,061.08
53,400.00
Less : interest
19,980.00
-
EBT (EAT/65%)
36,081.08
53,400.00
Less :TAX "35%
12,628.38
18,690.00
EAT (EPS X NO OF SHARE)
23,452.70
34,710.00
NO SHARES
12,500.00
18,500.00
EPS
1.88
1.88
4d
level of EBIT will EPS be identical for Plans I and II
let a be the that EBIT level
(a -26640)*65%/10500 = (a - 19980)*65%/12500
125a - 3330000=105a - 2097900
a = 61605
Plan I
Plan II
shares
10500
12500
Debt
296000
222000
1
EBIT
53400
53400
Less : interest
26640
19980
EBT
26760
33420
NO SHARES
10500
12500
EPS
2.55
2.67
2a
break-even level of EBIT
PLAN 1
ALL EQUITY
EBIT(EBT+INTEREST)
71,116.22
53,400.00
Less : interest
40,808.11
-
EBT (EPSXNO OF SHARE)
30,308.11
53,400.00
NO SHARES
10,500.00
18,500.00
EPS
2.89
2.89
2b
break-even level of EBIT
PLAN ii
ALL EQUITY
EBIT(EBT+INTEREST)
84,662.16
53,400.00
Less : interest
48,581.08
-
EBT (EPSXNO OF SHARE)
36,081.08
53,400.00
NO SHARES
12,500.00
18,500.00
EPS
2.89
2.89
3
level of EBIT will EPS be identical for Plans I and II
let a be the that EBIT level
(a -26640)/10500 = (a - 19980)/12500
125a - 3330000=105a - 2097900
a = 61605
4a
EPS
Plan I
Plan ii
EBIT
53,400.00
53,400.00
Less : interest
26,640.00
19,980.00
EBT
26,760.00
33,420.00
Less :TAX "35%
9,366.00
11,697.00
EAT
17,394.00
21,723.00
NO SHARES
10,500.00
12,500.00
EPS
1.66
1.74
4b
break-even level of EBIT for Plan I as compared to that for an all-equity plan
Plan I
All-equity plan
EBIT (EBT + INTEREST)
56,948.11
53,400.00
Less : interest
26,640.00
-
EBT (EAT/65%)
30,308.11
53,400.00
Less :TAX "35%
10,607.84
18,690.00
EAT (EPS X NO OF SHARE)
19,700.27
34,710.00
NO SHARES
10,500.00
18,500.00
EPS
1.88
1.88
4c
break-even level of EBIT for Plan II as compared to that for an all-equity plan
Plan ii
All-equity plan
EBIT (EBT + INTEREST)
56,061.08
53,400.00
Less : interest
19,980.00
-
EBT (EAT/65%)
36,081.08
53,400.00
Less :TAX "35%
12,628.38
18,690.00
EAT (EPS X NO OF SHARE)
23,452.70
34,710.00
NO SHARES
12,500.00
18,500.00
EPS
1.88
1.88
4d
level of EBIT will EPS be identical for Plans I and II
let a be the that EBIT level
(a -26640)*65%/10500 = (a - 19980)*65%/12500
125a - 3330000=105a - 2097900
a = 61605