Ignoring taxes when will eps be identical for plan i and ii

Reference no: EM13613302

Blue Stripes Co. is comparing two different capital structures. Plan I would result in 8,500 shares of stock and $313,500 in debt. Plan II would result in 12,000 shares of stock and $198,000 in debt. The interest rate on the debt is 10%.

A. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $53,000. The all-equity plan would result in 18,000 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 an all-equity plan? Is one higher than the other? Why?

C. Ignoring taxes, when will EPS be identical for Plan I and II? D. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 35%. Are the break-even levels of EBIT different from before? Why or Why not?

Reference no: EM13613302

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