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Compute the eps for the three plans

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DEF Company is comparing three different capital structures. Plan I would result in 800 shares of stock and $9,000 in debt. Plan II would result in 700 shares of stock and $13,500 in debt. Plan III is an all-equity plan and would result in 1,000 shares of stock. The firm's EBIT will be $8,000 per year until infinity. The interest rate on the debt is 10%.

a. Ignoring taxes, compute the EPS for each of the three plans. Which of the three plans has the highest EPS? Which has the lowest?

b. Compute the break-even EBIT that will cause the EPS on Plan I to be equal to the all-equity EPS.

c. Compute the break-even EBIT that will cause the EPS on Plan II to be equal to the all-equity EPS.

d. Compare your results from parts (b) and (c) above. Is one higher than the other? Why?

e. Ignoring taxes, what is the break-even EBIT that will cause the EPS on Plan I to be equal to the EPS on Plan II? What conclusions do you reach when you compare the outcomes of parts (b), (c), and (e) above?

Reference no: EM132371617

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