Break-Even EBIT and Leverage Kolby SpA is comparing two different capital structures. Plan I would result in 1,100 shares of equity and €16,500 in debt. Plan II would result in 900 shares of equity and €27,500 in debt. The interest rate on the debt is 10 per cent.

(a) Ignoring taxes, compare both of these plans with an allequity plan assuming that EBIT will be €10,000. The allequity plan would result in 1,400 shares of equity outstanding. Which of the three plans has the highest EPS? The lowest?

(b) In part

(a) what are the break-even levels of EBIT for each plan as compared with that for an all-equity plan? Is one higher than the other? Why?

(c) Ignoring taxes, when will EPS be identical for Plans I and II?

(d) Repeat parts (a),

(b) and

(c) assuming that the corporate tax rate is 31.4 per cent. Are the break-even levels of EBIT different from before? Why or why not?