Silverton Co. is comparing two different

LO 2 capital structures. Plan I would result in 11,500 shares of stock and

$494,000 in debt. Plan II would result in 16,000 shares of stock and

$260,000 in debt. The interest rate on the debt is 10 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan

assuming that EBIT will be $68,000. The all-equity plan would result

in 21,000 shares of stock outstanding. Which of the three plans has the

highest EPS? The lowest?

b. In part (a), what are the break-even levels of EBIT for each plan as

compared to that for an all-equity plan? Is one higher than the other? Why?

c. Ignoring taxes, when will EPS be identical for Plans I and II?

d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is

35 percent. Are the break-even levels of EBIT different from before?

Why or why not?