Question: Nashville Predators is comparing two different capital structures, an all-equity plan (Plan A) and a levered plan (Plan B). Under Plan A, the company would have 250,000 shares of stock outstanding. Under Plan IB, there would be 170,000 shares of stock outstanding and $2.5 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes.
a. If EBIT is $700,000, which plan will result in the higher EPS?
b. If EBIT is $1,400,000, which plan will result in the higher EPS?
c. What is the break-even EBIT?