Question: 4. Foundation Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company

4. Foundation Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 145,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $716,000 in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.

a. If EBIT is $300,000, which plan will result in the higher EPS?

b. If EBIT is $600,000, which plan will result in the higher EPS?

c. What is the break-even EBIT?

5. In Problem 4, use MM Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?

How to calculate the answer of Question 5?

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