Question: 6. DEF Company is comparing three different capital structures. Plan A is an all-equity plan and would result in 1000 shares of stock. Plan B

6. DEF Company is comparing three different capital structures. Plan A is an all-equity plan and would result in 1000 shares of stock. Plan B would result in 700 shares of stock and $13,500 in debt. Plan C would result in 800 shares of stock and $9000 in debt. The firms EBIT will be $10,000 per year until infinity. The interest rate on the debt is 12%. (12 marks)

a. Ignoring taxes, compute the EPS for each of the three plans. Which of the three plans has the highest EPS? Which has the lowest? (4 marks)

b. Compute the break-even EBIT that will cause the EPS on Plan B to be equal to the all-equity EPS (Plan A). (2 marks)

c. Compute the break-even EBIT that will cause the EPS on Plan C to be equal to the all-equity EPS (Plan A). (2 marks)

d. Compare your results from parts (b) and (c) above. Is one higher than the other? Why? (1 mark)

e. Ignoring taxes, what is the break-even EBIT that will cause the EPS on Plan B to be equal to the EPS on Plan C? What conclusions do we reach when we compare the results from parts (b), (c), and (e) above? (3 marks)

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