Relay Corp. is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 195,000 shares of stock outstanding. Under Plan II, there would be 140,000 shares of stock outstanding and $1,787,500 in debt outstanding. The interest rate on the debt is 8%, and there are no taxes.

A) What is the break-even EBIT?

a)

$2.60

b)

$507,000

c)

$2.05

d)

$590,000

B) If the corporate tax rate is 40%, which plan will result in the higher EPS at the break-even EBIT?

a)	Both Plan I and Plan II EPS will be $0.00

b)

Plan I

c)	Plan I and Plan II EPS will be equal.

d)

Plan II

C) Relay Corp. makes sorters for production lines in the food industry. Their lead time for making their product is 12 months. They have orders that will produce an EBIT of $700,000 right now. Based on this information, would you recommend Relay Corp. be levered or stay all equity?

a)	$700, 000 is less than the break even EBIT. They have guaranteed business that will produce EBIT of $700,000 over the next year. It makes sense to leverage because Relay's EPS will be higher.

b)	$700,000 is greater than the break even EBIT. They have guaranteed business that will produce EBIT of $700,000 over the next year. It makes sense to leverage because Relay's EPS will be higher.

c)	$700,000 is greater than the break even EBIT. They have guaranteed business that will produce EBIT of $700,000 over the next year. It makes sense to leverage because Relay's EPS will be lower.

d)	$700,000 is less than the break even EBIT. They have guaranteed business that will produce EBIT of $700,000 over the next year. It makes sense to leverage because Relay's EPS will be lower.