4. 4.

Break-Even EBIT [LO 16.1] Balcatta Trading is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 180 000 shares outstanding. Under Plan II, there would be 130 000 shares outstanding and $1.925 million in debt outstanding. The interest rate on the debt is 8 per cent and there are no taxes.

1. If EBIT is $400 000, which plan will result in the higher EPS?

2. If EBIT is $600 000, which plan will result in the higher EPS?

3. What is the break-even EBIT?