Question: Break-Even EBIT and Leverage Kolby Corp., is comparing two different capital structures. Plan I would result in 3,500 shares of stock and $37,440 in debt.

Break-Even EBIT and Leverage Kolby Corp., is comparing two different capital structures. Plan I would result in 3,500 shares of stock and $37,440 in debt. Plan II would result in 2,800 shares of stock and $66,560 in debt. The interest rate on debt is 10 percent.

A. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $14,800. The all-equity plan would result in 4,400 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 Plan 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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