Question: chapter 13: problem # 6: Break-even EBIT and Leverage. passion Co. is comparing two different capital structures.plan I would result in 5,000 shares of stock

chapter 13: problem # 6: Break-even EBIT and Leverage.

passion Co. is comparing two different capital structures.plan I would result in 5,000 shares of stock and $120,000 in debt.plan II would result in 7,000 shares of stock and $72,000 in debt.the interest rate on the debt is 10 percent.

A. ignoring taxes, compare both of these plans to an equityplan assuming that EBIT will be $15,000. the all-equity plan wouldresult in 10,000 shares of stock outstanding. which of the threeplans has the highest EPS? the lowest?

B. in part A, what are the break-even levels of EBIT for eachplans as compared to that for an all equity plan? is one higherthan the other? why?

C. Ignoring taxes, when will EPS be identicalfor plan I and II?

D. Repeat parts a, b, c assuming that thecorporate tax rate is 38 percent. are the break-even levels of EBITdifferent from before? why or why not?

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