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Can you please show me the work and steps for how you got the answers?
Coldstream Corp. is comparing two different capital structures. Plan I would result in 13,000 shares of stock and $100,000 in debt. Plan II would result in 10,500 shares of stock and $150,000 in debt. The interest rate on the debt is 10 percent.
a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $90,000. The all-equity plan would result in 18,000 shares of stock outstanding. What is the EPS for each of these plans? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
| 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? (Do not round intermediate calculations.)
| 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? (Do not round intermediate calculations.)
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? (Do not round intermediate calculations.)
| EBIT | ||
| Plan I and all-equity | $ | |
| Plan II and all-equity | $ | |
d-3 Assuming that the corporate tax rate is 40 percent, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.)
EBIT $
Expert Answer
a.
| EPS | |||
| PLAN I | $ | 6.15 | |
| PLAN II | $ | 7.14 | |
| ALL EQUITY | $ | 5.00 | |
Working for the above is given below
| Ref. | Unit | Plan I | Plan II | All Equity | ||
| No.of shares | (A) | Number | 13000 | 10500 | 18000 | |
| Debt | (B) | $ | 100000 | 150000 | 0 | |
| Interest rate | (C) | % | 10 | 10 | 0 | |
| Inerest Expense (B * C) | (D) | $ | 10000 | 15000 | 0 | |
| EBIT | (E) | $ | 90000 | 90000 | 90000 | |
| EBT (E – D) | (F) | $ | 80000 | 75000 | 90000 | |
| EPS (F / A) | (G) | $ | 6.15 | 7.14 | 5.00 | |
| (b) Break even level of each plan compared to all equity plan is as fllows | |||||
| EBIT | |||||
| PLAN I & ALL EQUITY | $ | 36,000 | |||
| PLAN III & ALL EQUITY | $ | 36,000 | |||
The working for the above is given below.
| PLAN I and ALL EQUITY | ||||
| EPS under PLAN I | =(EBIT – Interest) / No. Of shares | |||
| =(EBIT – 10,000) / 13,000 | ||||
| EPS under ALL EQUITY | =EBIT / 18,000 | |||
| For break even EPS under PLAN I = EPS under ALL EQUITY | ||||
| (EBIT – 10,000)/13000 = EBIT / 18000 | ||||
| (EBIT – 10,000 ) * 18,000 = EBIT * 13,000 | ||||
| EBIT * 18,000 – 180,000,000 = EBIT * 13,000 | ||||
| 5,000 EBIT = 180,000,000 | ||||
| EBIT = 180,000,000/5,000 = 36,000 | ||||
| PLAN I and ALL EQUITY | ||||
| EPS under PLAN II | =(EBIT – Interest) / No. Of shares | |||
| =(EBIT – 15,000) / 10,500 | ||||
| EPS under ALL EQUITY | =EBIT / 18,000 | |||
| For break even EPS under PLAN II = EPS under ALL EQUITY | ||||
| (EBIT – 15,000)/10,500 = EBIT / 18,000 | ||||
| (EBIT – 15,000 ) * 18,000 = EBIT * 10,500 | ||||
| EBIT * 18,000 – 270,000,000 = EBIT * 10,500 | ||||
| 7,500 EBIT = 270,000,000 | ||||
| EBIT = 270,000,000/7,500 = 36,000 | ||||
c. EBIT $36,000
Working is shown below
| PLAN I and PLAN II | ||||
| EPS under PLAN I | =(EBIT – Interest) / No. Of shares | |||
| =(EBIT – 10,000) / 13,000 | ||||
| EPS under PLAN II | =(EBIT – Interest) / No. Of shares | |||
| =(EBIT – 15,000) / 10,500 | ||||
| For break even EPS under PLAN I = EPS under PLAN II | ||||
| (EBIT – 15,000)/10,500 = (EBIT – 10,000)/13,000 | ||||
| (EBIT – 15,000 ) * 13,000 = (EBIT-10,000) * 10,500 | ||||
| EBIT * 13,000 – 195,000,000 = EBIT * 10,500 – 105,000,000 | ||||
| 2,500 EBIT = 90,000,000 | ||||
| EBIT = 90,000,000/2,500 = 36,000 | ||||
