1. Your firm currently has 245,000 shares outstanding. You are considering two financing plans for an acquisition. Plan I uses all equity to fund the deal and requires the issuance of 120,000 new shares. Plan II uses $4.56 million of 10% debt to fund the acquisition. The firms tax rate is 21%. a. If EBIT is $1.25 M, what is the EPS for each plan? b. If EBIT is $1.75 M, what is the EPS for each plan?

2. Your firm needs to borrow $500 million for four years and is choosing between a private bond placement and a public underwritten offering. The bonds will make annual coupon payments. The private bond investors demand a 6.75% coupon and a loan origination fee of 1.5%, while the underwriter charges a 3% fee to place the bonds and estimates the public bonds would require a 6.5% coupon. What is the effective cost of borrowing under each option? c. What is the break-even level of EBIT?