The Lemaster Company is a new firm that wishes to determine an appropriate capital structure. It can issue 16 percent debt or 15 percent preferred stock.

Moreover, common stock can be sold at $20 per share. In all cases, total capitalization of the company will be $5 million, and it is expected to have a 30 percent tax rate. The possible capital structures are Plan Debt Preferred Equib

a. Construct an EBIT-EPS chart for the four plans.

b. Determine the relevant indifference points.

c. Using Eq. (10-I), verify the indifference points on your graph for the dominant plans.

d. Which plan is best?