Problem 16-6 Break-Even EBIT and Leverage [LO1, 2]

Destin Corp. is comparing two different capital structures. Plan I would result in 18,000 shares of stock and $95,000 in debt. Plan II would result in 14,000 shares of stock and $190,000 in debt. The interest rate on the debt is 5 percent.

a.	Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $90,000. The all-equity plan would result in 22,000 shares of stock outstanding. What is the EPS for each of these plans? (Round your answers to 2 decimal places. (e.g., 32.16))

	EPS
Plan I	$
Plan II	$
All equity	$

b.	In part (a), what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?

	EBIT
Plan I and all-equity	$
Plan II and all-equity	$

c.	Ignoring taxes, at what level of EBIT will EPS be identical for Plans I and II?

EBIT

$

d-1	Assuming that the corporate tax rate is 40 percent, what is the EPS of the firm? (Round your answers to 2 decimal places. (e.g., 32.16))

	EPS
Plan I	$
Plan II	$
All equity	$

d-2	Assuming that the corporate tax rate is 40 percent, what are the break-even levels of EBIT for each plan as compared to that for an all-equity plan?

	EBIT
Plan I and all-equity	$
Plan II and all-equity	$

d-3	Assuming that the corporate tax rate is 40 percent, when will EPS be identical for Plans I and II?

EBIT

$