(a) The Red Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 375,000 shares of stock outstanding. Under Plan II, there would be 225,000 shares of stock outstanding and $6 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes. a. If EBIT is $3,800,000, which plan will result in the higher EPS? b. If EBIT is $6.700,000, which plan will result in the higher EPS? c. What is the break-even EBIT? (3 marks) (3 marks) (4 marks) Total (10 marks)

(a) The Red Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 375,000 shares of stock outstanding. Under Plan II, there would be 225,000 shares of stock outstanding and $6 million in debt outstanding. The interest rate on the debt is 11 percent, and there are no taxes. a. If EBIT is $3,800,000, which plan will result in the higher EPS? (3 marks ) b. If EBIT is $6.700,000, which plan will result in the higher EPS? ( 3 marks) c. What is the break-even EBIT? (4 marks) Total (10 marks)