What is the value of the firm

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Rolston Corporation is comparing 2 different capital structures, an all equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Rolston would have 265,000 shares of stock outstanding. Under Plan II, there would be 185,000 shares of stock outstanding and $2.8 million in debt outstanding. The interest rate on the debt is 10% and there are no taxes.

a. If EBIT is $750,000, which plan will result in the higher EPS?

b. If EBIT is $1,500,000, which plan will result in the higher EPS?

c. What is the break-even EBIT?

d. In the previous problem, use MM Proposition I to find the price per share of equity under each of the 2 proposed plans. What is the value of the firm?

Reference no: EM133110265

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