Problem:
The company is comparing two different capital structures. Plan 1 would result in 2,000 shares of stock and $40,000 in debt and plan 2 would result in 4,000 shares of stock and $20,000 in debt. The interest rate is 10%.
So if i ignored taxes and compare both of these plans to an all equity plan assuming EBIT is $5,000 and the all equity plan is 6,000 shares of stock outstanding then which plan has a higher EPS? I also am confused on how to find the break even levels of EBIT for each plan compared to the all equity plan.
One last question, how would I know when the EPS for plans 1 and 2 will be identical?