Highest earnings-per-share, Financial Management

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McGovern Company is comparing two disimilar capital structures - an all-equity plan (Plan I) and a levered plan (Plan II).  Under Plan I, the Company would have 700,000 shares of stock outstanding.  Under Plan II, the Company would have 450,000 shares of stock outstanding and $6 million in debt outstanding.  The interest rate on the debt would be 10%.  Suppose no taxes.

( a ) If earnings before interest is $1.3 million, which plan would result in the highest earnings-per-share? 

( b ) If earnings before interest is $2.8 million, which plan would result in the highest earnings-per-share?  


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