QUESTION TWO

Fast Track, Inc., is considering three financing plans. The key information follows. Assume a 50 percent tax rate.

Plan A

Common stock: $200,000

Plan B

Bonds at 8%: $100,000

Common stock: $100,000

Plan C

Preferred stock at 8%: $l00,OOO

Common stock: $100,000

In each case the common stock will be sold at $20 per share. The expected EBIT is $80,000. Determine ( a ) the EPS for each plan, and (6) the financial break-even point for each plan. ( c ) Draw the EBIT-EPS graph. ( d ) Indicate over what EBIT range each plan is preferred.