Question: ABC PTY LTD is comparing two different capital structures. Plan I would result in 12700 shares and $109250 in debt. Plan II would result in

ABC PTY LTD is comparing two different capital structures. Plan I would result in 12700 shares and $109250 in debt. Plan II would result in 9800 shares and $247000 in debt. The interest rate on the debt is 10 per cent. a) Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $79000. The all-equity plan would result in 15000 shares 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 company tax rate is 30 per cent. Are the break-even levels of EBIT different from before? Why or why not?

e) Leverage and share value .Ignoring taxes, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?

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