Animal Enzymes Inc. is now completely financed with equity. Most of the stock is owned by a consortium of pharmaceutical companies. There are now 500,000 shares in existence; the stock is not publicly traded but a reliable estimate values it at $50 per share. AE wants to raise $10,000,000 to finance expansion. Investment bankers have suggested two potential plans.

A. $5,000,000 of new equity at the current value of $50 per share and $5,000,000 of privately placed debt at 6% interest.

B. Raise the whole $10,000,000 with a privately placed bond issue at 6% interest. Under either plan, AE's marginal tax rate will be 34%.

a) Estimate earnings per share for both plans at EBIT levels of $1,500,000, $2,000,000, and $2,500,000.

b. At what level of EBIT would earnings per share be the same under either plan?

c. If Animal Enzymes expects EBIT will be at least $2,000,000 next year and grow rapidly thereafter, which plan should they choose?