Question: Your firm is considering two financing plans. The key information follows: use a 20% tax rate. Source of Funds Plan A Plan B Long-term Debt

Your firm is considering two financing plans. The key information

follows: use a 20% tax rate.

Source of Funds Plan A Plan B

Long-term Debt $1000 at 6% $5000 at 10%

Preferred Stock 100 shares, $2 20 shares, $2

dividend per share dividend per share

Common Stock 120 shares 30 shares

--------------------------------------------------------------------------------------

Draw the EPS-EBIT line for each plan on the same set of axes. Over what range of EBIT would you prefer Plan A?

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