Stuck on requirement 3. Doing Algebra to solve for EBIT and getting EBIT=174857.
ID: 2795309 • Letter: S
Question
Stuck on requirement 3. Doing Algebra to solve for EBIT and getting EBIT=174857.149. It's incorrect. Please show all calculations. Thanks
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.
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. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16).)
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.
Requirement 3: lgnoring taxes, at what level of EBIT will EPS be identical for Plans I and Il? (Do not round intermediate calculations.) EBIT Requirement 4 Assume the corporate tax rate is 32 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 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 Il 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 112 (Do not round intermediate calculations.) EBITExplanation / Answer
1. EPS of all equity: 54400/18000 =3.02
EPS of I : (54400 - 0.1*306000)/9000 = (54400-30600)/9000 = 2.64
EPS of II: (54400 - 0.1*198900)/12150 = (54400-19890)/12150 = 2.84
3. For EPS of plan I and II to be equal:
(EBIT- 0.1*306000)/9000 = (EBIT -0.1*198900)/12150
(EBIT-30600)/9000 = (EBIT-19890)/12150
(EBIT-30600) = (EBIT-19890)/12150*9000 = (EBIT-19890)*0.74
EBIT - 0.74EBIT = 30600-19890*0.74
0.26EBIT = 15881.4
EBIT = 61082.30
4.a. EPS of all equity : (54400 - 0.32* 54400)/18000 = 2.05
EPS of I : (54400 - 0.1*306000)(1-0.32)/9000 = 1.79
EPS of II: (54400 - 0.1*198900)(1-0.32)/12150 = 1.93