Problem 14-6 Break-Even EBIT and Leverage

Coldstream Corp. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $60,000 in debt. Plan II would result in 5,000 shares of stock and $140,000 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 $60,000. The all-equity plan would result in 12,000 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	$	6 6
Plan II	$	9.20
All equity	$	5 5

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	$	24000
Plan II and all-equity	$	24000

c. Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II? (Do not round intermediate calculations.) EBIT $ 24000 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	$	3.60
Plan II	$	5.52
All equity	$	3 3

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	$	Not attempted
Plan II and all-equity	$	Not attempted

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 $