16-17A. (Capital structure theory) Boston Textiles has an all-common-equity capital structure.

Pertinent financial characteristics for the company are shown below:

Shares of common stock outstanding = 1,000,000 Common stock price, Po = $20 per share Expected level of EBIT = $5,000,000 Dividend payout ratio = 100 percent opinion as to what the stock price would be under the financing plan outlined in problem 16-12A The consultant agreed that the projected long-term EBIT level of $1,800,000 was reasonable. He also felt that if plan A were selected, the marketplace would apply a price/earnings ratio of 12 times to the company's stock; for plan B he estimated a price/earnings ratio of 10 times.

a. According to this information, which financing alternative would offer a higher stock price?

b. What price/earnings ratio applied to the EPS related to plan B would provide the same stock price as that projected for plan A?

c. Comment on the results of your analysis of problems 16-12A and 16-13A.