6. 6.

Break-Even EBIT and leverage [LO 16.1, 16.2] Kojonup Freight Lines is comparing two different capital structures. Plan I would result in 12 700 shares and $109 250 in debt. Plan II would result in 9 800 shares and $247 000 in debt. The interest rate on the debt is 10 per cent.

1. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $79 000. The all-equity plan would result in 15 000 shares outstanding. Which of the three plans has the highest EPS? The lowest? 2. In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan? Is one higher than the other? Why?

3. Ignoring taxes, when will EPS be identical for Plans I and II?

4. Repeat parts (a),

(b) and (c), assuming that the company tax rate is 30 per cent. Are the break-even levels of EBIT different from before? Why or why not?