Question: Passion Co. is comparing two different capital structures. Plan I would result in 5,000 shares of stock and $120,000 in debt. Plan II would result

Passion Co. is comparing two different capital structures. Plan I would result in 5,000 shares of stock and $120,000 in debt. Plan II would result in 7,000 shares of stock and $72,000 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 $15,000. The all-equity plan would result in 10,000 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest?

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, when will EPS be identical for Plans I and II?

d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 38 percent. Are the break-even levels of EBIT different from before? Why or why not?

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a The income statement for each capitalization plan is Plan I has the lowest EPS the allequity plan has the highest EPS b The breakeven level of EBIT ... View full answer

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