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Star Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Star would have
Star Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Star would have 250,000 shares of stock outstanding. Under Plan II, there would be 150,000 shares of stock outstanding and $2,000,000 in debt outstanding. The interest rate on the debt is 8% and there are no taxes. a. If EBIT is 200,000, which plan will result in the higher EPS? (2 marks) b. If EBIT is 500,000, which plan will result in the higher EPS? (2 marks) c. What is the break-even EBIT? (3 marks) d. Find the price per share of equity and the value of the firm under each of the two proposed plans. (6 marks)
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