Rolston Corporation is comparing two different capital structures, an all-equity plan (PLAN I) and a levered plan (Plan II). Under Plan 1, Rolston would have 240,000 shares of stock outstanding. Under Plan II, there would be 160,000 shares of stock outstanding and $3.1 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes.
a. If EBIT is $750,000, which plan will result in the high EPS?
b. If the EBIT is 1,500,000, which plan will result in higher EPS?
c. What is the break-even EBIT?