Question: M&M and Stock Value. In Problem, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?
Problem: Break-Even EBIT. Kyle 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 300,000 shares of stock outstanding. Under Plan II, there would be 210,000 shares of stock outstanding and $2,367,000 in debt outstanding. The interest rate on the debt is 10 percent, and there are no taxes.
a. If EBIT is $600,000, which plan will result in the higher EPS?
b. If EBIT is $900,000, which plan will result in the higher EPS?
c. What is the break-even EBIT?