(Answered) Question leverage and stock value ignoring taxes in problem

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Question: Leverage and Stock Value. Ignoring taxes in Problem, what is the price per share of equity under Plan I? Plan II? What principle is illustrated by your answers?

Problem: Break-Even EBIT and Leverage. Silverton Co. is comparing two different capital structures.

Plan I would result in 11,500 shares of stock and $494,000 in debt.

Plan II would result in 16,000 shares of stock and $260,000 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 $68,000. The all-equity plan would result in 21,000 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?

d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 35 percent. Are the break-even levels of EBIT different from before? Why or why not?

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