Question

Can you please solve each of these questions in details and like step by step

1. Linkin Park Corp., is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Linkin Park would have 100,000 shares of stock outstanding. Under Plan II, there would be 50,000 shares of stock outstanding and $1.5 million in debt outstanding. The interest rate on the debt is 10% and there are no taxes.

1. If EBIT is $200,000, which plan will result in a higher EPS? (Plan I)
2. If EBIT is $700,000, which plan will result in a higher EPS? (Plan II)
3. What is the break-even EBIT? ($300,000)

Answer 1