5. A company is comparing the following two different capital structures: Plan 1 -All equity; and...

5. A company is comparing the following two different capital structures:

Plan 1 -All equity; and Plan 2 -a levered plan.

Under plan 1 the firm would have 200,000 shares of stock outstanding.

Under plan 2, there would be 100,000 shares of stock outstanding plus $4 million in debt. The interest rate on the debt is 10 percent. Tax rate is 40%.

a.If the expected EBIT is $500,000, which plan will result in higher EPS?

($1.50; 0.60)

b. If the expected EBIT is $3.5 million, which plan will result in higher EPS? ($11.50, $18.00)

c. What is the indifference point? ($800,000); what is its implication

Expert Solution

jeff jeffy answered 2 years ago

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5. A company is comparing the following two different capital structures: Plan 1 -All equity; and...

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