Break Even EBIT
4. Yasmin Corporation is comparing two different capital structures, an all equity plan(plan i) and levered plan (plan II). Under plan I, Yasmin would have 170,000 shares of stock outstanding. Under Plan II, there would be 120,000 shares of stock outstanding and $1.675 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.
A. If EBIT is $300,000. which plan will result in the higher EPS?
B. If EBIT is $600,000 which plan will result in the higher EPS?
C. What is the break-even EBIT?
5. MM and Stock Value
In problem 4, use MM Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?