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What is the EPS for each of these plans

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Question - Kolby Corp. is comparing two different capital structures. Plan I would result in 3,500 shares of stock and $37,440 in debt. Plan II would result in 2,800 shares of stock and $66,560 in debt. The interest rate on the debt is 10 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $14,800. The all-equity plan would result in 4,400 shares of stock outstanding. What is the EPS for each of these plans?

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?

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

d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 21 percent. Are the break even levels of EBIT different than before? Why or why not?

Reference no: EM132921151

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