Finance Misc. Multiple Problems

Jimmy’s Cricket Farm issued a 30-year, 8 percent semiannual bond 3 years ago. The bond currently sells for 93 percent of its face value. The company’s tax rate is 35 percent.
a) What is the pretax cost of debt?
b) What is the aftertax cost of debt?
c) Which is more relevant, pretax or the aftertax cost of debt? Why?

Mullineaux Corporation has a target capital structure of 60 percent common stock, 5 percent preferred stock, and 35 percent debt. Its cost of equity is 12 percent, the cost of preferred stock is 5 percent, and the pretax cost of debt is 7 percent. The relevant tax rate is 35 percent.
a) What is Mullineaux’s WAAC?
b) The company president has approached you about Mullineaux’s capital structure. He wants to know why the company doesn’t use more preferred stock financing because it costs less than debt. What would you tell the president?

Destin Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $90,000 in debt. Plan II would result in 7,600 shares of stock and $198,000 in debt. The interest on the debt is 10 percent.
a) Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $48,000. The all-equity plan would result in 12,000 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest?
The all equity plan has the highest ESP and Plan II has the lowest ESP
I II All Equity
EBIT $48,000 $48,000 $48,000
Interest 9,000 19,800
NI 39,000 28,200 48,000
EPS 39,000/10,000=3.9 28,200/76,000=3.71 48,000/12,000=4

b) In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? Is one higher than the other? Why?
EPS =(EBIT-RDD)/Shares standing
$54,000; $54,000
c) Ignoring taxes, when will EPS be identical for Plans I and II?
$54,000
d) Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 40 percent. Are the break-even levels of EBIT different than before? Why or why not?
$2.34; $2.23; $2.40; $54,000; $54,000