Company A and Company B are identical in every way except their capital structures. Company A, an all-equity firm, has 14,000 shares of stock outstanding, currently worth $30 per share. Company B uses leverage in its capital structure. The market value of Company B debt is $64,000, and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of $74,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year.

1. What is the value of Company A?

2. What is the value of Company B?

3. What is the market value of Company B's equity?

4. How much will it cost to purchase 20 percent of each company's equity?

Assuming each company meets its earnings estimates, what will be the dollar return to each position in part 4 over the next year?

Company C is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 190,000 shares of stock outstanding. Under Plan II, there would be 140,000 shares of stock outstanding and $2 million in debt outstanding. The interest rate on the debt is 8 percent and there are no taxes.

1. EBIT is $625,000, what is the EPS for each plan?

2. If EBIT is $875,000, what is the EPS for each plan?

3. What is the break-even EBIT?