Business, 21.05.2020 03:03 imantahir1200345

Square Block Company is comparing two different capital structures: An all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 350,000 shares of stock outstanding. Under Plan II, there would be 225,000 shares of stock outstanding and $5 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes. a. If EBIT is $1,000,000, which plan will result in the higher EPS? b. If EBIT is $1,500,000, which plan will result in the higher EPS? c. What is the break-even EBIT?

Answers: 1

Show answers

Answers

Answer from: orozcoalbeert

a. If EBIT is $1,000,000 Plan 1 will give higher EPS

b. If EBIT is $1,500,000 Plan 2 will give higher EPS

c. The break-even EBIT would be $ 1,400,000

Explanation:

a) In Plan 1

According to given data EBIT = $1,000,000

Since there is no debt, so there is no interest. Also there are no taxes

So , earnings avaliable to shareholders = $ 1,000,000

shares of stock outstanding = 350,000

EPS = 1,000,000 / 350,000 = 2.857

Plan 2

EBIT = $1,000,000

Debt = 5000000

Interest = 10% * 5000000 = $ 500000

So , EBIT -interest = $ 500000

Earnings avaliable to shareholders = $ 500000

shares of stock outstanding = 225000

EPS = 500000/ 225000= 2.222

So Plan 1 will give higher EPS

b) Plan 1

EBIT = $1,500,000

Since there is no debt, so there is no interest. Also there are no taxes

So , earnings avaliable to shareholders = $ 1,500,000

shares of stock outstanding = 350,000

EPS = 1,500,000 / 350,000 = 4.286

Plan 2

EBIT = $1,500,000

Debt = 5000000

Interest = 10% * 5000000 = $ 500000

So , EBIT -interest = $ 1000000

Earnings avaliable to shareholders = $ 1000000

shares of stock outstanding = 225000

EPS = 1000000/ 225000= 4.444

So Plan 2 will give higher EPS

Let the breakeven EBIT be 'x'

So,

In breakeven EBIT both EPS for plan 1 and 2 will be same

So,

x / 350000 = ( x - 500000) / 225000

Solving for x , x= 1400000

Breakeven EBIT = $ 1,400,000

Answer from: Quest

Some disadvantages to leasing a car is that you are counting on someone to give you money every week or month depending on what you decided and if they don't have all of it well what if you needed that money now you as well have to pay not in full. a disadvantages to purchasing a new vehicle is if it is used then not all the time will absolutely everything work. its almost like a trail and era. although if it is a new car they will try to though all these specials and deals at you in your lease and it can be very overwhelming if you are not use to it.

Answer from: Quest

hi : ) i found this so i hope this !

"we first find value of tax in dollars.

the difference between the two prices is: 23. 54 - 22 = 1.54

therefore the sales tax in dollars is 1.54

the tax % will be (amount of tax / original cost price ) × 100

(1.54 / 22) × 100 → (0.07) × 100 = 7

so the tax rate is 7%

we can double check the answer.

7 % of 22 → (7/100) × 22 → 0.07 × 22 = 1.54

22 + 1.54 = 23.54"

Another question on Business

Business, 21.06.2019 20:40

Alocal club is selling christmas trees and deciding how many to stock for the month of december. if demand is normally distributed with a mean of 100 and standard deviation of 20, trees have no salvage value at the end of the month, trees cost $20, and trees sell for $50 what is the service level?

Answers: 2

Answer

Business, 21.06.2019 20:50

Tyler has coffee with one of his direct reports almost daily. he does this to inquire in an informal way about progress on the job, and to provide coaching and support, as well as appropriate congratulations for special efforts. tyler is exhibiting which type of managerial skill?

Answers: 1

Answer

Business, 22.06.2019 05:00

Which of the following differentiates cost accounting and financial accounting? a. the primary users of cost accounting are the investors, whereas the primary users of financial accounting are the managers. b. cost accounting measures only the financial information related to the costs of acquiring fixed assets in an organization, whereas financial accounting measures financial and nonfinancial information of a company's business transactions. c. cost accounting measures information related to the costs of acquiring or using resources in an organization, whereas financial accounting measures a financial position of a company to investors, banks, and external parties. d. cost accounting deals with product design, production, and marketing strategies, whereas financial accounting deals mainly with pricing of the products.

Answers: 3

Answer

Business, 22.06.2019 10:30

The card shoppe needs to maintain 21 percent of its sales in net working capital. currently, the store is considering a four-year project that will increase sales from its current level of $349,000 to $408,000 the first year and to $414,000 a year for the following three years of the project. what amount should be included in the project analysis for net working capital in year 4 of the project?

Answers: 3

Answer

You know the right answer?

Square Block Company is comparing two different capital structures: An all-equity plan (Plan I) and...

Questions