Coyote Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 205,000 shares of stock outstanding. Under Plan II, there would be 155,000 shares of stock outstanding and $3.1 million in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.
If EBIT is $850,000, what is the EPS for each plan?
If EBIT is $1,150,000, what is the EPS for each plan?
What is the break-even EBIT?
Use M&M Proposition I to find the price per share. What is the value of the firm under each of the two proposed plans?