The Lopez-Portillo Company has $10.6 million in assets, 80 percent financed by debt, and 20 percent financed by common stock. The interest rate on the debt is 9 percent and the par value
of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $18 million in assets.
Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 12 percent! Under Plan B, only new common stock
at $10 per share will be issued. The tax rate is 40 percent.
a.) if EBIT is 9% on total assets, compute earnings per share before the expansion and under the two alternatives.