Plan 1

EQUITY SHARES = 210,000

no debt

Plan 2

Equity shares = 150,000

Debt = $ 2,280,000 at 8%

Tax rate for both plans 40%

So

Interest obligations for the debt = 8% of 2,280,000 = 182,400

Part a

EBIT 500,000

Calculation are as follows

Plan 1

EBIT	5,00,000
les Interest
EBT	5,00,000
Less Tax	200000
EAT	3,00,000
No of shares	2,10,000
EPS	1.43

Taxes are calculate don the EBT after interest is deducted from the EBIT . Tax rate given is 40%

Plan 2

EBIT	5,00,000
les Interest	182400
EBT	3,17,600
Less Tax	127040
EAT	1,90,560
No of shares	150000
EPS	1.27

So Plan 1 is having higher EPS

Part B

When EBIT = 750,000

For Plan 1

EBIT	7,50,000
les Interest
EBT	7,50,000
Less Tax	300000
EAT	4,50,000
No of shares	2,10,000
EPS	2.14

For Plan 2

EBIT	7,50,000
les Interest	182400
EBT	5,67,600
Less Tax	227040
EAT	3,40,560
No of shares	1,50,000
EPS	2.27

Interest obligations on the debt is 182,400 as calculated above

So Plan 2 is having higher EPS

No in order to break even , both the financing plans have the similar set of EPS , so we are indifferent between it ,

So

Plan 1 EPS = Plan 2 EPS

EBIT / NO OF SHARES = EBIT – INTEREST / NO OF SHARES

= EBIT / 210,000 = (EBIT – 182,400) / 150,000

OR

60,000 EBIT = 182400 * 210000

Solving we get

EBIT = 638,400

So we are indifferent between the plans EPS at an EBIT level of 638400

EPS of plans

Plann 1

EBIT	6,38,400
les Interest
EBT	6,38,400
Less Tax	255360
EAT	3,83,040
No of shares	2,10,000
EPS	1.82

Plan 2

EBIT	6,38,400
les Interest	182400
EBT	4,56,000
Less Tax	182400
EAT	2,73,600
No of shares	1,50,000
EPS	1.82