Break-Even EBIT and Leverage. Betts Co. is comparing two different capital
structures. Plan I would result in 2,000 shares of stock and $40,000 in debt. Plan II
would result in 4,000 shares of stock and $20,000 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 $5,000. The all-equity plan would result in 6,000 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 38 percent.
Are the break-even levels of EBIT different from before? Why or why not?
Break-Even EBIT and Leverage. Betts Co. is comparing two different capital structures.
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