Bellwood Corp. is comparing two different capital structures.Plan I would result in 12,700 shares of stock and $109,250 in debt.Plan II would result in 9,800 shares of stock and $247,000 in debt.The interest rate on the debt is 10 percent.
a. Ignoring taxes, compare both of these plans to an all-equityplan assuming that EBIT will be $79,000. The all-equity plan wouldresult in 15,000 shares of stock outstanding. Which of the threeplans has the highest EPS? The lowest?
b. In part (a), what are the break-even levels of EBIT for eachplan as compared to that for an all-equity plan? Is one higher thanthe other? Why?
c. Ignoring taxes, when will EPS be identical for Plans I andII?
d. Repeat parts (a), (b), and (c) assuming that the corporatetax rate is 21 percent. Are the break even levels of EBIT differentfrom before? Why or why not?
