Question: ABC Co. is comparing two different capital structures. Plan I would result in 1,000 shares of stock and $30,000 in debt. The interest rate on

ABC Co. is comparing two different capital structures. Plan I would result in 1,000 shares of stock and $30,000 in debt. The interest rate on the debt is 10 percent. Plan II would be an all-equity plan with 3000 shares of stock. Find the break-even level of EBIT. At an EBIT level of $5,000, which plan will have a higher level of EPS?

Break even EBIT

EPS under Plan 1 = EPS under plan 2

(X-3000)/1000 = X/3000

1000X = 3000(X - 3000)

1000X = 3000X - 9000

2000X = 9000

X = 9000/2 i.e 4500

Break even EBIT = 4500

Particulars	Plan 1	Plan 2
EBIT	5000	5000
Less: Interest	3000	0
EBT	2000	5000
Number of shares	1000	3000
EPS	2	1.67

Plan 1 will have higher EPS

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