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A company is comparing three different capital structures: Plan I would result in 15,000 shares of stock outstanding (all-equity plan). Plan II would result in
A company is comparing three different capital structures: Plan I would result in 15,000 shares of stock outstanding (all-equity plan). Plan II would result in 12,000 shares of stock and 100,000 in debt. Plan III would result in 8,000 shares of stock and 200,000 in debt. The interest rate on the debt is 10 percent. A company expects to earn EBIT 95,000. Ignore taxes. Instructions: 1.Calculate EPS for each plan. 2.Which plan do you recommend to the company? Explain the effect of financial leverage.
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