XYZ Corp is comparing two different capital structures. Under Plan I, the company has no debt and has 100,000 shares of stock outstanding selling at a price of $20 per share. Under Plan II, the company will convert 40,000 shares of stock outstanding to debt at an interest rate of 10%. Assume that there are no taxes.

a. If EBIT is $100,000, which plan will result in higher ROE?

b. If EBIT is $800,000, which plan will result in higher ROE?

c. What can you conclude from the values of ROE obtained in a. and b.?