premiun or a discoun

Not just a warming beverage, coffee has become an integral part of one's hectic lifestyle. Since Pacific Coffee's founder Tom Nier brought the American coffee culture to Hong Kong in 1992, it has devoted to providing an affordable yet luxury coffee experience with an East meets West concept and expanding our coffee selection with quality as our first priority. Now Pacific Coffee (HK) is considering whether its business should expand in the next few years. Currently, it is offered two capital structures when starting up new coffee shops: (i) an all equity plan: 200,000 shares outstanding (ii) a levered plan: 100,000 shares outstanding; $2.8 million in debt outstanding with an 10% interest rate; and there are no taxes. Required: (a) If EBIT is expected to be $400,000, appraise which option will result in a higher EPS. (8 marks) (b) Assess the equity-debt break-even EBIT. (4 marks) (c) "Airline industry has a high degree of operating leverage", one customer in the coffee shop claimed. Discuss whether you agree with this statement or not. (6 marks) (d) Given that the firm uses only debt and equity financing, and the risks of both are increased by increased borrowing, the overall risk of the firm will increase and therefore the firm value will decrease", another customer said. Comment on this customer's viewpoint. (7 marks)