Moon Corp. is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Moon would have 295,000 shares of stock outstanding. Under Plan II, there would be 215,000 shares of stock outstanding and $3.4 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes. a. If EBIT is $800,000, calculate the EPS for each plan. b. If EBIT is $1,600,000, calculate the EPS for each plan. c. Calculate the break-even EBIT.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Moon Corp. is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan
(Plan II). Under Plan I, Moon would have 295,000 shares of stock outstanding. Under Plan II, there
would be 215,000 shares of stock outstanding and $3.4 million in debt outstanding. The interest rate on
the debt is 10 percent and there are no taxes.
a. If EBIT is $800,000, calculate the EPS for each plan.
b. If EBIT is $1,600,000, calculate the EPS for each plan.
c. Calculate the break-even EBIT.
Transcribed Image Text:Moon Corp. is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Moon would have 295,000 shares of stock outstanding. Under Plan II, there would be 215,000 shares of stock outstanding and $3.4 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes. a. If EBIT is $800,000, calculate the EPS for each plan. b. If EBIT is $1,600,000, calculate the EPS for each plan. c. Calculate the break-even EBIT.
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