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10 November, 13:34

Destin Corp is comparing three different capital structures. Plan A would result in 10,000 shares of stock and $90,000 in debt. Plan B would result in 7,600 shares of stock and $198,000 in debt. The all equity plan would result in 12,000 shares of stock outstanding. The interest rate on debt is 10%, and the EBIT is $48,000. If Destin Corp has a tax rate of 40%, which of the three plans has the highest EPS?

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  1. 10 November, 17:07
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    All equity plan (12,000 shares with an EPS of $2.40)

    Explanation:

    Plan A (10,000 shares):

    interest = $90,000 x 10% = $9,000

    net income = (ebit - interest) x (1 - 40%) = ($48,000 - $9,000) x 60% = $23,400

    earnings per share (EPS) = $23,400 / 10,000 shares = $2.34 per share

    Plan B (7,600 shares):

    interest = $198,000 x 10% = $19,800

    net income = (ebit - interest) x (1 - 40%) = ($48,000 - $19,800) x 60% = $16,920

    earnings per share (EPS) = $16,920 / 7,600 shares = $2.23 per share

    All equity plan (12,000 shares):

    net income = ebit x (1 - 40%) = $48,000 x 60% = $28,800

    earnings per share (EPS) = $28,800 / 12,000 shares = $2.40 per share
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