BNB Bank is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the bank would have 800,000 shares of stock outstanding. Under Plan II, there would be 320,000 shares of stock outstanding and $10 million in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
a. If EBIT is $1.5 million, which plan will result in the higher EPS?
b. If EBIT is $5 million, which plan will result in the higher EPS?
c. What is the break-even EBIT?