Blue Stripes Co. is comparing two different capital structures. Plan I would result in 9,000 shares of stock and $342,000 in debt. Plan II would result in 12,600 shares of stock and $205,200 in debt. The interest rate on the debt is 10 percent.

Requirement 1:

Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $53,500. The all-equity plan would result in 18,000 shares of stock outstanding. Compute the EPS for each plan.

Requirement 2:

(a) In req. (1), what is the break-even level of EBIT for Plan I as compared to that for an all-equity plan?

(b) In req. (1), what is the break-even level of EBIT for Plan II as compared to that for an all-equity plan?

Requirement 3:

Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?

Requirement 4:

Assume the corporate tax rate is 30 percent.

(a) Compute the EPS for each plan.

(b) What is the break-even level of EBIT for Plan I as compared to that for an all-equity plan?

(c) What is the break-even level of EBIT for Plan II as compared to that for an all-equity plan?

(d) At what level of EBIT will EPS be identical for Plans I and II?

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