Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan

Question:

Rolston Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 265,000 shares of stock outstanding. Under Plan II, there would be 185,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes.

a. If EBIT is $750,000, which plan will result in the higher EPS?

b. If EBIT is $1,500,000, which plan will result in the higher EPS?

c. What is the break-even EBIT?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...