Ignoring taxes in problem 16.6, what is the price per share of equity under plan I? Plan II? What principle is illustrated by your answers?
In Problem 16.6
Kolby Corp. is comparing two different capital structures. Plan I would result in 900 shares of stock and $65,700 in debt. Plan II would result in 1,900 shares of stock and $29,200 in debt. The interest rate on the debt is 10 percent.
Ignoring taxes compare both of these plans to an all-equity plan assuming that EBIT will be $8,500. The all-equity plan would result in 2,700 shares of stock out-standing. Which of the three plans has the highest EPS? The lowest?