Question
Kyle 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
Kyle 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 300,000 shares of stock
outstanding. Under Plan II, there would be 210,000 shares of stock outstanding and
$2,367,000 in debt outstanding. The interest rate on the debt is 10 percent, and there are 30%
taxes.
(a) If EBIT is $600,000, which plan will result in the higher EPS?
(6 marks)
(b) If EBIT is $900,000, which plan will result in the higher EPS?
(6 marks)
(c) What is the break-even EBIT?
(6 marks)
(d) Use M&M Proposition I to find the price per share of equity under each of the two
proposed plans. What is the value of the firm?
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