Sunban Corp. is comparing two different capital structures. Plan A would result

Question

Sunban Corp. is comparing two different capital structures. Plan A would result in 1,210 shares of stock and $18,150 in debt. Plan B would result in 990 shares of stock and $30,250 in debt. The interest rate on the debt is 11 percent.

(a)Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $11,000. The all-equity plan would result in 1,540 shares of stock outstanding. Plan A has an EPS of $7.44. Plan B has an EPS of $7.75, and All-Equity Plan has an EPS of $7.14.

(b) In part (a) the break-even levels of EBIT for Plans A and B are $________ and $________, respectively, as compared to that for an all-equity plan. (round to 2 decimals)

(c). Ignoring tasex, EPS will be identical for Plans A and B when their EBITs are each $________. (Round to nearest whole dollar)

I got (a), just cannot get (b) and (c).

Explanation / Answer

break even level of pllan A :

For break even level of EBIT

For plan A and all equity plan, t=0

[(EBIT*-I1)(1-t)]/n1 = [(EBIT*-I2)(1-t)]/n2

[(EBIT*-1996.5)/1210] = [(EBIT*-0)/1540]

330EBIT*=3074610

EBIT*=9317

break even level of PLAN B

For break even level of EBIT

For plan I and all equity plan, t=0

[(EBIT*-I1)(1-t)]/n1 = [(EBIT*-I2)(1-t)]/n2

[(EBIT*-3327.5)/990] = [(EBIT*-0)/1540]

550EBIT*=5124350

EBIT*=9317

c) For break even level of EBIT

For plan I and all equity plan, t=0

[(EBIT*-I1)(1-t)]/n1 = [(EBIT*-I2)(1-t)]/n2

[(EBIT*-1996.5)/1210] =[(EBIT*-3327.5)/990]

220EBIT*=2049740

EBIT*=9317

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