Power Co Pty Ltd is comparing two alternative capital structures: an all-equity plan (Plan A)

and a leveraged plan (Plan B). Under Plan A, Power Co would have 60,000 shares

outstanding. Under Plan B, Power Co would have 40,000 shares and $150,000 in debt

outstanding. The interest rate is 10% and the corporate tax rate 30%.

a) If EBIT is $30,000, which plan result in the higher EPS?

b) If EBIT is $60,000, which plan results in the higher EPS?

c) What is the break even EBIT for both plans?

d) What is the EBIT (EBIT Indifference level) that will generate exactly the same EPS

under both plans?

e) Plot the two capital structures on a graph with a set of EBIT- EPS axes.