Use the following information to answer questions 4a.1-4a.5 Gerrell Corp. is comparing two different capital structures. Plan I would result in 18,000 shares of stock and $95,000 in debt. Plan II would result in 14,000 shares of stock and $190,000 in debt. The interest rate on the debt is 5 percent. Compare both of these plans to an all-equity plan assuming that EBIT will be $90,000. The all-equity plan would result in 22,000 shares of stock outstanding. Assuming that the corporate tax rate is 40 percent, what is the EPS for each of these plans

Question

14-07-2020
Business

contestada

Use the following information to answer questions 4a.1-4a.5 Gerrell Corp. is comparing two different capital structures. Plan I would result in 18,000 shares of stock and $95,000 in debt. Plan II would result in 14,000 shares of stock and $190,000 in debt. The interest rate on the debt is 5 percent. Compare both of these plans to an all-equity plan assuming that EBIT will be $90,000. The all-equity plan would result in 22,000 shares of stock outstanding. Assuming that the corporate tax rate is 40 percent, what is the EPS for each of these plans

Respuesta :

Otras preguntas

The decline in buffalo herds in the late 1800s can be attributed to all of the following, except a. poaching of hides c. long periods of drought on the plains

Why was 1776 a turning point in American history?

What did President Lincoln risk if he chose not to resupply Fort Sumter?

Select all that apply. Any element can always be identified by its _____. a. atomic mass b. number of neutrons c. number of protons d. atomic number

A dime is 1.25 mm thick. How many meters high would a stack of dimes worth $50 be? a. 0.00625 m b. 6.25 m c. 625 m d. 0.625 m not sure if i'm dividing it ri

In what ways did the Catholic Church serve as a unifying force in Western Europe from late classical times to the Renaissance? a. The Church did not attempt to

A dime is 1.25 mm thick. How many meters high would a stack of dimes worth $50 be? a. 0.00625 m b. 6.25 m c. 625 m d. 0.625 m not sure if i'm dividing it ri

Which set of steps shows the solution to the equation 3y = -9? a. y = -9 - 3; y = 6 b. y = -9 divided by 3; y = -3 c. y = -9 divided by (3); y = 3 d. y = -9

According to the second law of thermodynamics, energy tends to become more spread out. True False

The weight of an object is the product of its mass, m, and the acceleration of gravity, g (where g=9.8 m/s2). If an object’s mass is m=10. kg, what is its weigh

anthougo anthougo · Answer 1 · 2020-07-23T05:42:20+02:00

Answer:

Gerrel Corp.

EPS (Earnings per share) = Earnings after Tax/Number of outstanding shares

Plan I:

EBIT = $90,000

Interest = $4,750 ($95,000 x 5%)

Pre-Tax Income = $85,250

Income Tax Exp. 34,100 ($85,250 x 40%)

After Tax Income $51,150

EPS = $51,150/18,000 = $2.84 per share

Plan II:

EBIT = $90,000

Interest = $9,500 ($190,000 x 5%)

Pre-Tax Income = $80,500

Income Tax Exp. 32,200 ($80,500 x 40%)

After Tax Income $48,300

EPS = $48,300/14,000 = $3.45 per share

Plan III:

EBIT = $90,000

Pre-Tax Income = $90,000

Income Tax Exp. 36,000 ($90,000 x 40%)

After Tax Income $54,000

EPS = $54,000/22,000 = $2.45 per share

Explanation:

a) Data and Calculations:

Plan I = 18,000 shares + $95,000 debt

Plan II = 14,000 shares + $190,000 debt

Difference = 4,000 shares + $95,000 debt

Share price = $95,000/4,000 = $23.75

EBIT = $90,000

Interest Rate = 5%

Corporate Tax Rate = 40%

b) Capital Structure:

Plan I: (Equity and Debt)

Shares of 18,000 x $23.75 + $95,000 debt = $522,500 in total capital

Plan II: (Equity and Debt)

Shares of 14,000 x $23.75 + $190,000 debt = $522,500 in total capital

Plan III: (All-equity plan):

Shares of 22,000 x $23.75 = $522,500 in total capital

c) The Earnings per share is the measurement of the Net Income to stockholders divided by the number of outstanding shares. It gives an idea about the profitability of the entity, especially with regard to the profit made for common stockholders. The EPS is also one of the metrics used in the calculation of the P/E ratio to indicate whether a company's shares are undervalued or overvalued.