Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2769338 • Letter: C
Question
Cooke Co. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $342,000 in debt. Plan II would result in 12,600 shares of stock and $205,200 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 $53,500. The all-equity plan would result in 18,000 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 9,000 shares of stock and $342,000 in debt. Plan II would result in 12,600 shares of stock and $205,200 in debt. The interest rate on the debt is 10 percent.
Explanation / Answer
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.)
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 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?
Plan I Plan II All-equity plan No of shares 9000 12600 18000 Debt 342000 205200 0 Interests rate 10% 10% 10% EBIT 53500 53500 53500 Less Interests 34200 20520 0 TAX 0 0 0 Net Income 19300 32980 53500 EPS =Net Income/No Of Shares 2.14 2.62 2.97