In: Finance
Break-Even EBIT and Leverage
Kolby Corp. is comparing two different capital structures. Plan I
would result in 3,500 shares of stock and $37,440 in debt. Plan II
would result in 2,800 shares of stock and $66,560 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 $14,800. The all-equity plan would result in 4,400 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 21 percent. Are the
break-even levels of EBIT different from before? Why or why
not?
Show all the steps and don't round off calculations.