Sanborn corp is comparing two different capital structures, Ask an Expert

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Sanborn Corp. is comparing two different capital structures. Plan 1 would result in 3,100 shares of stock and $23,160 in debt. Plan II would result in 2,500 shares of stock and $46,320 in det. The interest rate on the debt is 7 percent.

a. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $8,500. The all-equity plan would result in 3,700 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 to Plans I and II?

d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 40 percent. Are the break-even levels of EBIT different from before? Why or why not?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91785557

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