Question: XYZ firm is comparing two different capital structures CURRENT PLAN NEW PLAN EQUITY SHARES OUTSTANDING 1,120,000 60,000 DEBT 0 20,000,000 COST OF DEBT 6% 6%

  1. XYZ firm is comparing two different capital structures

CURRENT PLAN

NEW PLAN

EQUITY SHARES OUTSTANDING

1,120,000

60,000

DEBT

0

20,000,000

COST OF DEBT

6%

6%

Assuming no tax

  1. If EBIT is $1,200,000, which plan will result in the higher EPS?

  1. What is the break-even EBIT at which both the Plans would give the same EPS?

  1. What is the significance of the break-even EBIT? Why is it determined?

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