keenan corp. is comparing two different capital structure.

plan 1: would result in 7000 shares of stock and $160,000 in debt.
plan 2: would result in 5000 shares of stock and $24,000 in debt. the interest rate on the debt is 10 percent.
Q:
(a)ignoring taxes, compare the both of these plans to an all equity plan assuming thta EBIT will be $39,000. the all equity plan would result in 11,000 shares of stock outstanding. which of the three plans has the highest EPS?the lowest?

b. in part (a) what are the break even levels is of EBIT for each plan sa compared that for an all-equty plan?is one higher than the other? why?
C. ignoring taxes, when will EPS be identical for plans 1 and 2?
d. repeat parts (a), (b), (c) assuming that the corporate tax rate is 40%. are the break-even levels of EBIT different from before? why or why not?

a) 4.33

To compare the three plans, we need to calculate the Earnings Per Share (EPS) for each plan using the given information.

(a) Ignoring taxes, let's calculate the EPS for each plan.

Plan 1:
Number of shares = 7,000
EBIT = $39,000
Interest expense = $160,000 * 0.10 = $16,000

EPS for Plan 1 = (EBIT - Interest expense) / Number of shares = (39,000 - 16,000) / 7,000

Plan 2:
Number of shares = 5,000
EBIT = $39,000
Interest expense = $24,000 * 0.10 = $2,400

EPS for Plan 2 = (EBIT - Interest expense) / Number of shares = (39,000 - 2,400) / 5,000

All Equity Plan:
Number of shares = 11,000
EBIT = $39,000

EPS for All Equity Plan = EBIT / Number of shares = 39,000 / 11,000

Now, compare the EPS values to determine which plan has the highest and lowest EPS.

(b) To find the break-even levels of EBIT for each plan compared to the All Equity Plan, we need to set the EPS of each plan equal to the EPS of the All Equity Plan and solve for EBIT.

(c) To determine when the EPS will be identical for Plans 1 and 2, we set the EPS of Plan 1 equal to the EPS of Plan 2 and solve for EBIT.

(d) Let's repeat parts (a), (b), and (c) considering a corporate tax rate of 40%.

Please provide the interest rate for Plan 1 and Plan 2 in order to provide accurate answers for parts (a), (b), (c), and (d).

To compare the capital structure plans and determine their impact on EPS and break-even levels of EBIT, we can follow these steps:

(a) EPS Comparison:
1. Calculate the earnings before interest and taxes (EBIT) for each plan:
- Plan 1: EBIT = $39,000 - $160,000 (debt * interest rate) = $39,000 - $16,000 = $23,000
- Plan 2: EBIT = $39,000 - $24,000 (debt * interest rate) = $39,000 - $2,400 = $36,600
- All equity plan: EBIT = $39,000

2. Calculate the EPS for each plan:
- Plan 1: EPS = EBIT / Number of shares = $23,000 / 7,000 shares
- Plan 2: EPS = EBIT / Number of shares = $36,600 / 5,000 shares
- All equity plan: EPS = EBIT / Number of shares = $39,000 / 11,000 shares

Compare the EPS values obtained from these calculations to determine which plan has the highest and lowest EPS.

(b) Break-even Comparison:
The break-even level of EBIT is the point at which earnings are equal to 0. To compare the break-even levels between the plans:

1. Set the EPS equation for each plan to 0 and solve for EBIT:
- Plan 1: 0 = EBIT - $16,000 (debt * interest rate)
- Plan 2: 0 = EBIT - $2,400 (debt * interest rate)
- All equity plan: 0 = EBIT

Compare the break-even levels of EBIT between the plans to determine if one is higher than the other.

(c) Identical EPS Calculation:
To determine when the EPS for plans 1 and 2 will be identical, set the EPS equations for both plans equal to each other and solve for EBIT.

(d) Repeat Steps (a), (b), and (c) with Corporate Tax Rate:
Taking corporate tax rate of 40% into account, follow the same steps as before, but consider the tax implications when calculating EPS and break-even levels of EBIT.

Comparing the results obtained with and without taxes will help determine the impact of taxes on EPS and break-even levels.