Reference no: EM131732842
Question: Leverage and Stock Value. Ignoring taxes in Problem, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?
Problem: Break-Even EBIT and Leverage. Silverton Co. is comparing two different capital structures.
Plan I would result in 11,500 shares of stock and $494,000 in debt.
Plan II would result in 16,000 shares of stock and $260,000 in debt. The interest rate on the debt is 10 percent.
a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $68,000. The all-equity plan would result in 21,000 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 Plans I and II?
d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 35 percent. Are the break-even levels of EBIT different from before? Why or why not?
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Net total profit or loss on this investment
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What are the break-even levels of ebit
: Leverage and Stock Value. Ignoring taxes in Problem, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?
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