Question

Please do it in excel showing the formula

Sanborn Corp. is comparing two different capital structures. Plan I would result in 2,300 shares of stock and $22,560 in debt. Plan II would result in 1,400 shares of stock and $47,940 in debt. The interest rate on debt is 10 percent.

1. a) Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $7,000. The all-equity plan would result in 3,100 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest?

2. 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?

Answer 1

a)

All equity has highest EPS

Plan II has lowest EPS

b)

Breakeven EBIT are all equal , No plan is higher than the other. Break even EBIT itself means all EBIT should be equal.