Question
2. The Lancet Co. is comparing two different capital structures. Plan I would result in 800 shares of stock and $14,000 in debt. Plan II
2. The Lancet Co. is comparing two different capital structures. Plan I would result in 800 shares of stock and $14,000 in debt. Plan II would result in 900 shares of stock and $7000 in debt. The interest rate on the debt is 11%. a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $5000. The all-equity plan would result in 1000 shares outstanding.
a.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 to 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 38%. Are the break-even levels of EBIT different from before? Why or why not?
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