DAR Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered...

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Finance

DAR Corporation is comparing two different capital structures:an all-equity plan (Plan I) and a levered plan (Plan II). UnderPlan I, the company would have 190,000 shares of stock outstanding.Under Plan II, there would be 140,000 shares of stock outstandingand $2.8 million in debt outstanding. The interest rate on the debtis 6 percent, and there are no taxes.

a.
If EBIT is $275,000, what is the EPS for each plan? (Donot round intermediate calculations and round your answers to 2decimal places, e.g., 32.16.)

EPS
  Plan I $
  Plan II $

b.
If EBIT is $525,000, what is the EPS for each plan? (Donot round intermediate calculations and round your answers to 2decimal places, e.g., 32.16.)

EPS
  Plan I $
  Plan II $

c.
What is the break-even EBIT? (Do not round intermediatecalculations. Enter your answer in dollars, not millions ofdollars, e.g., 1,234,567.)

  Break-even EBIT $

Answer & Explanation Solved by verified expert

3.9 Ratings (554 Votes)

	Plan I	Plan II
EBIT	275000	275000
less:Interest	0	(168000) [2800000*.06]
EBT	275000	107000
lesS:tax	0	0
Net income	275000	107000
shares outstanding	190000	140000
Earning per share	275000/190000=$ 1.45	107000/140000=$ .76

EBIT	525000	525000
less:Interest	0	(168000) [2800000*.06]
EBT	525000	357000
lesS:tax	0	0
Net income	525000	357000
shares outstanding	190000	140000
Earning per share	525000/190000=2.76	357000/140000= 2.55

C)At breakeven ,EPS under both plans are equal .

In case of no taxes ,Breakeven EBIT is calculated as :EBIT /Shares outstanding under Plan I=[EBIT -Interest ]/shares outstanding under plan II

EBIT /190000 = [EBIT -168000]/140000

140000 EBIT /190000 = EBIT -168000

.73684 EBIT = EBIT -168000

EBIT -.73684 EBIT = 168000

.26316 EBIT = 168000

EBIT = 168000/.26316

= $ 638394.89 (ROUNDED TO 638,395)

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Transcribed Image Text

DAR Corporation is comparing two different capital structures:an all-equity plan (Plan I) and a levered plan (Plan II). UnderPlan I, the company would have 190,000 shares of stock outstanding.Under Plan II, there would be 140,000 shares of stock outstandingand $2.8 million in debt outstanding. The interest rate on the debtis 6 percent, and there are no taxes. a.If EBIT is $275,000, what is the EPS for each plan? (Donot round intermediate calculations and round your answers to 2decimal places, e.g., 32.16.) EPS Plan I$ Plan II$ b.If EBIT is $525,000, what is the EPS for each plan? (Donot round intermediate calculations and round your answers to 2decimal places, e.g., 32.16.) EPS Plan I$ Plan II$ c.What is the break-even EBIT? (Do not round intermediatecalculations. Enter your answer in dollars, not millions ofdollars, e.g., 1,234,567.) Break-even EBIT$