Stern’s Stews Inc. is considering a new capital structure. Its current and proposed capital structures are the following:

Stern’s Stews’ president expects next year’s EBIT to be $20 million, but it may be 25 percent higher or lower. Ignoring taxes, perform an EBIT/eps analysis. What is the indifference level of earnings before interest and taxes? Should Stern’s Stews change its capital structure? Why?

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Current Proposed Total assets $150 million $150 million Debt 25 million 100 million 125 million Equity 50 million Common stock price $50 $50 Number of shares 2,500,000 1,000,000 12% Interest rate 12%