Texts: Hughenden Woollen Mills Ltd is comparing two different capital structures. Plan I would result in 12,700 shares and $109,250 in debt. Plan II would result in 9,800 shares and $247,000 in debt. The interest rate on the debt is 10%. Ignoring taxes, compare both of these plans with an all‐equity plan, assuming that EBIT will be $79,200. The all‐equity plan would result in 15,000 shares outstanding.
a. 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, compared with that for an all‐equity plan? Is one higher than the other? Why?
c. Ignoring taxes, when will EPS be identical for both plans?
d. Repeat parts a, b, and c, assuming that the corporate tax rate is 30%. Are the break‐even levels of EBIT different from before? Why or why not?