13.1 Break-Even EBIT and Leverage: Honeycutt Co. is comparing two different capital structures. Plan I would result in 12,700 shares of stock and $109,250 in debt. Plan II would result in 9,800 shares of stock and $247,000 in debt. The interest rate on the debt is 10 percent.
Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $79,000. The all-equity plan would result in 15,000 shares of stock outstanding. Which of the three plans has the highest EPS? The lowest? Fill the income statement for each capitalization plan in the table below:
Plan I
Plan II
All-equity
EBIT
Interest
NI
EPS
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?
Ignoring taxes, when will EPS be identical for Plans I and II?
Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 21 percent. Are the break-even levels of EBIT different from before? Why or why not? Fill the income statement for each capitalization plan in the table below:
Plan I
Plan II
All-equity
EBIT
Interest
Taxes
NI
EPS
