Question Answered step-by-step   DEF Company is comparing three different capital structures

Question

Answered step-by-step

DEF Company is comparing three different capital structures. Plan A is an all-equity plan and would result in 1000 shares of stock. Plan B would result in 700 shares of stock and $13,500 in debt. Plan C would result in 800 shares of stock and $9000 in debt. The firm's EBIT will be $10,000 per year until infinity. The interest rate on the debt is 12%.

a. Ignoring taxes, compute the EPS for each of the three plans. Which of the three plans has the highest EPS? Which has the lowest?    

b. Compute the break-even EBIT that will cause the EPS on Plan B to be equal to the all-equity EPS (Plan A).

c. Compute the break-even EBIT that will cause the EPS on Plan C to be equal to the all-equity EPS (Plan A).

d. Compare your results from parts (b) and (c) above. Is one higher than the other? Why?

e.      Ignoring taxes, what is the break-even EBIT that will cause the EPS on Plan B to be equal to the EPS on Plan C? What conclusions do we reach when we compare the results from parts (b), (c), and (e) above?