Solved: Which plan will result in the higher eps, Finance Basics

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Which plan will result in the higher eps

Problem:

A company is comparing two different capital structures:

An all equity plan (PLAN 1) and a levered plan (PLAN 2). Under plan 1 the company would have 200,000 shares of stock outstanding. Under plan 2 there would be 90,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 8% and there are not taxes.

If EBIT is $150,000 which plan will result in the higher EPS?

If EBIT is $300,000 which plan will resulting the higher EPS?

What is the break even EBIT?

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