Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2758901 • Letter: C
Question
Cooke 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 lgnoring 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 round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).) EPS Plan I All-equity plan 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 Il as compared to that for an all- equity plan? (Do not round intermediate calculations.) EBITExplanation / Answer
Cooke Co Details Plan I Plan II All Equity Plan No Of Equity Shares 8,700 12,000 18,200 Amount Of Debt 323,000 210,800 - EBIT 53,100 53,100 53,100 Interest on Debt @10% 32,300 21,080 Earning Before Tax 20,800 32,020 53,100 Tax - - - Net Earning 20,800 32,020 53,100 EPS $ 2.39 $ 2.67 $ 2.92 2a. Assume break even EBIT for Plan I & All Equity =k k-32300/8700=k/18200 18200k-587860000=8700k k= 61880 So Break even EBIT =$61,880 2b Assume break even EBIT for Plan II & All Equity =k k-21080/12000=k/18200 18200k-383656000=12000k k=61880 So Break even EBIT =$61,880 3 At EBIT 61880 the EPS for Plan I & Ii are same ($3.40) 4 Details Plan I Plan II All Equity Plan 4a No Of Equity Shares 8,700 12,000 18,200 Amount Of Debt 323,000 210,800 - EBIT 53,100 53,100 53,100 Interest on Debt @10% 32,300 21,080 Earning Before Tax 20,800 32,020 53,100 Tax @30% 6,240 9,606 15,930 Net Earning 14,560 22,414 37,170 EPS $ 1.67 $ 1.87 $ 2.04 4b Assume break even EBIT for Plan I & All Equity =k (k-32300)*0.70/8700=k*0.70/18200 12740k-411502000=6090k k= 61880 So Break even EBIT =$61,880 4c Assume break even EBIT for Plan II & All Equity =k (k-21080)*0.70/12000=k*0.70/18200 12740k-268559200=8400k k=61880 So Break even EBIT =$61,880 4d At $61880 level the EPS for Plan I & Ii will be same ($2.38)