2.99
See Answer

In Problem 4, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm?

Problem 4:

Foundation, Inc., is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 145,000 shares of stock outstanding. Under Plan II, there would be 125,000 shares of stock outstanding and $716,000 in debt outstanding. The interest rate on the debt is 8 percent, and there are no taxes.

a. If EBIT is $300,000, which plan will result in the higher EPS?

b. If EBIT is $600,000, which plan will result in the higher EPS?

c. What is the break-even EBIT?