Question

Destin Corp. is comparing two different capital structures. Plan I would result in 12,000 shares of stock and $120,000 in debt. Plan II would result in 11,500 shares of stock and $140,000 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 $70,000. The all-equity plan would result in 15,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16))

Answer 1

Plan 1= $40 per shares

Plan 2= $40 per shares

Step-by-step explanation:

We can therefore calculate the price as the value of shares repurchased divided by the number of shares repurchased.

Hence:

Plan I, the value per share will be:

P = $120,000 / (15,000 – 12,000 shares)

P=$120,000/$3,000

P = $40 per share

Plan II, the value per share will be :

P = $140,000 / (15,000 – 11,500 shares)

P=$140,000/$3,500

P = $40 per share

Therefore the EPS for each of these plans is Plan l =$40 per shares and Plan ll=$40 per shares