Question: Coldstream Corp. is comparing two different capital structures. Plan I would result in 4,950 shares of stock and $10,255 in debt. Plan II would result

Coldstream Corp. is comparing two different capital structures. Plan I would result in 4,950 shares of stock and $10,255 in debt. Plan II would result in 4,500 shares of stock and $23,440 in debt. The interest rate on the debt is 7 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $8,400. The all-equity plan would result in 5,300 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 21 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 I II Allequity EBIT 8400 8400 8400 Interest 718 1641 0 NI 7682 6759 8400 EPS 155 150 158 The al... View full answer

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