Break-Even EBIT and Leverage. Cooke Co. is comparing two different capital structures
| Break-Even EBIT and Leverage. Cooke Co. is comparing two different capital structures. Plan I would result in 8,500 shares of stock and $361,000 in debt. Plan II would result in 12,000 shares of stock and $228,000 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 $61,000. The all-equity plan would result in 18,000 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? |
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