Gabe's Market is comparing two different capital structures.Plan I would result in 11,000 shares of stock and $225,000 in debt.Plan II would result in 14,000 shares of stock and $150,000 in debt.The interest rate on the debt is 8 percent.Ignoring taxes,compare both of these plans to an all-equity plan assuming that EBIT will be $45,000.The all-equity plan would result in 20,000 shares of stock outstanding.Of the three plans,the firm will have the highest EPS with _____ and the lowest EPS with ____.
A)Plan I; Plan II
B)Plan I; all-equity plan
C)Plan II; Plan I
D)Plan II; all-equity plan
E)all-equity plan; Plan I

Question

Quizplus · Accepted Answer

EPS_All-equity = $45,000/20,000 = $2.25EPS_{Plan I} = [$45,000 - ($225,000 × 0.08)]/11,000 = $2.45EPS_{Plan II} = [$45,000 - ($150,000 × 0.08)]/14,000 = $2.36

Gabe's Market Is Comparing Two Different Capital Structures