Case Scenario:
Sanborn Corp. is comparing two different capital structures. Plan I would result in 14,000 shares of stock and $95,000 in debt. Plan II would result in 8,000 shares of stock and $190,000 in debt. The interest rate on the debt is 9 percent.
Q1. 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?
Plan I
Plan II
All Equity
Q2. In part (1), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?
Plan I and all-equity
Plan II and all-equity
Q3. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?
Q4.
A) Assuming that the corporate tax rate is 40%, what is the EPS of the firm?
Plan I
Plan II
All Equity
B) Assuming that the corporate tax rate is 40%, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?
Plan I and all-equity
Plan II and all-equity
C) Assuming that the corporate tax rate is 40%, at what level of EBIT will EPS be identical for Plans I & II?