Cooke Co. is comparing two different capital structures. Plan I would result in
ID: 2769577 • 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.
Requirement 1: 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).)
EPS Plan I $ 2.55 Plan II $ 2.67 All-equity plan $ 2.89
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 $ 56,948.11
(b) 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.) EBIT $
Requirement 3: Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.) EBIT $
Requirement 4: Assume the corporate tax rate is 35 percent.
(a) 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 $ Plan II $ All-equity plan $
(b) 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 $
(c) 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.) EBIT $ (d) At what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.) EBIT $
Please show every step for the break-even level of EBIT calculation. Thank you.
Explanation / Answer
Requirement 1
Requirement 2 (a)
2.89*10500 = 30345
EAT should be 30345 for the same EPS of all equity plan. Therefore 30345 - 26760 = 3585. There shuld be an icrease of $3585 to EBIT to get the same EPS.
(b)For Break Even EBIT
2.89*12500 = 36125
EAT should be 36125 for the same EPS of all equity plan. Therefore 36125 - 33420 = 2705. There shuld be an icrease of $2705 to EBIT to get the same EPS.
Requirement 3
Requirement 4 (a)
(b)
1.88*10500 = 19740
EAT should be 19740 for the same EPS of all equity plan. Therefore 19740 - 17394 = 2346. There shuld be an icrease of $2346 to EBIT to get the same EPS.
(c)
1.88*12500 = 23500
EAT should be 23500 for the same EPS of all equity plan. Therefore 23500 - 21723 = 1777. There shuld be an icrease of $1777 to EBIT to get the same EPS.
All equity Plan 1 Plan 2 EBIT 53400 53400 53400 Interest @9% 26640 19980 Tax 0 0 0 EAT 53400 26760 33420 Numbero f shares 18500 10500 12500 EPS 2.89 2.55 2.67