Question: Sanborn Corp. is comparing two different capital structures. Plan I would result in 2,300 shares of stock and $22,560 in debt. Plan II would result

Sanborn Corp. is comparing two different capital structures. Plan I would result in 2,300 shares of stock and $22,560 in debt. Plan II would result in 1,400 shares of stock and $47,940 in debt. The interest rate on debt is 10 percent.

a) Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $7,000. The all-equity plan would result in 3,100 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 allequity plan? Is one higher than the other? Why?

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