Question: Destin Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $ 90,000 in debt. Plan II would

Destin Corp. is comparing two different capital structures. Plan I would result in 10,000 shares of stock and $ 90,000 in debt. Plan II would result in 7,600 shares of stock and $ 198,000 in debt. The interest rate on the debt is 10 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $ 48,000. The all-equity plan would result in 12,000 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 Plans I and II?

d. Repeat parts ( a), ( b), and ( c) assuming that the corporate tax rate is 40 percent. Are the break- even levels of EBIT different from before? Why or why not?

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