XYZ Corporation is comparing two different capital structures: an all-equity plan (Plan 1) and a levered plan (Plan 2). Under Plan 1, the company would have $3.0 million of stock outstanding (equity). Under Plan 2, there would be 800,000 shares of stock outstanding and $2.2 million in debt outstanding. The interest rate on the debt is 8 percent, and tax rate is 40%.

a. Calculate the point of indifference/breakeven EBIT. (4 points)

b.Explain briefly which plan the firm should follow and why. (6 points)