Question
Kolby Corp. is comparing two different capital structures. Plan I would result in 14,000 shares of stock and $100,000 in debt. Plan II would result
Kolby Corp. is comparing two different capital structures. Plan I would result in 14,000 shares of stock and $100,000 in debt. Plan II would result in 8,000 shares of stock and $200,000 in debt. The interest rate on the debt is 6 percent.
a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $80,000. The all-equity plan would result in 20,000 shares of stock outstanding. What is the EPS for each of these plans? (round your answers to 2 decimal places)
EPS
Plan I Plan II All equity
b. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? ( round your answers to the nearest whole number)
EBIT
Plan I and all-equity $
Plan II and all-equity $
c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (round your answer to the nearest whole number)
EBIT $
d-1. Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
EPS
Plan I
Plan II All equity
d-2. Assuming that the corporate tax rate is 40 percent, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? (round your answers to the nearest whole number)
EBIT Plan I and all-equity
Plan II and all-equity
d-3. Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II? (round your answer to the nearest whole number)
EBIT
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