Keenan Corp. is comparing two different capital structures. Plan I would result in 7000 shares of stock and $160,000 in debt. Plan II would result is 5000 shares of stock and $240,000 in debt. The interest rate on the debt is 10 percent.
a. Ignore taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $39,000. The all-equity plan will result in 11,000 shares of stock outstanding. which of three plans has the highest EPS? The lowest?
b. In part (a) what are 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 part (a), (b) and (c) assuming that the corporate tax rate is 40 percent. Are the break-even levels of EBIT different from before? why or why not?