Petty 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 200,000 shares of stock outstanding. Under Plan II, there would be 90,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

a. If EBIT is $150,000, which plan will result in the higher EPS?

b. If EBIT is $300,000, which plan will result in the higher EPS?

c. What is the break-even EBIT?

Answers:

a. I: EPS = $0.75 ; II: EPS = $0.33

b. I: EPS = $1.50 ; II: EPS = $2.00

c. $218,181.82

Please show all your work.