Trapper Corporation 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 320,000 shares of stock outstanding. Under Plan II, there would be 240,000 shares of stock outstanding and $2,272,000 in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
a. If EBIT is $700,000, which plan will result in the higher EPS?
b. If EBIT is $950,000, which plan will result in the higher EPS?
c. What is the break-even EBIT?