DEF Company is comparing three different capital structures. Plan I would result in 800 shares of stock and $9,000 in debt. Plan II would result in 700 shares of stock and $13,500 in debt. Plan III is an all-equity plan and would result in 1,000 shares of stock. The firm’s EBIT will be $8,000 per year until infinity. The interest rate on the debt is 10%.

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?

b. Compute the break-even EBIT that will cause the EPS on Plan I to be equal to the all-equity EPS. 

c. Compute the break-even EBIT that will cause the EPS on Plan II to be equal to the all-equity EPS. 

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

e. Ignoring taxes, what is the break-even EBIT that will cause the EPS on Plan I to be equal to the EPS on Plan II? What conclusions do you reach when you compare the outcomes of parts (b), (c), and (e) above?

Answer rating: 100% (QA)

a Plan 1 Plan 2 Plan 3 No of shares 800 700 1000 Debt 9000 13500 0 Interest rate 10 ... View the full answer