Haskell Corp. is comparing two different capital structures. Plan I would result in 13,000 shares of stock and $130,500 in debt. Plan II would result in 10,400 shares of stock and $243,600 in debt. The interest rate on the debt is 10 percent.
a) Ignoring taxes, compare both of these plans to an all equity plan assuming that EBIT will be $56,000. The all equity plan would result in 16,000 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest?
b) In part (a) what are the break even levels of EBIT for each plan as compared to that for all equity plan? Is one higher than the other? Why?
c) Ignoring taxes, when will EPS be identical for Plans I an II?
d) Repeat parts (a), (b), (c) assuming that the corporate tax rate is 40 percent. Are the break even levels of EBIT different from before? Why or why not?