Chill, a new themed restaurant, is comparing two different potential capital structures. Plan I
3. Netflix Chill, a new themed restaurant, is comparing two different potential capital structures. Plan I
would result in 13,000 shares of stock and $130,500 in debt. Plan II would result in 10,400 shares of stock and $243,600 in debt. The interest rate on the debt is 10 percent.
A. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $56,000. The allequity plan would result in 16,000 shares of stock outstanding. What is the EPS under each of the three options? What is the breakeven EBIT levels (as compared to the all equity plan) for each of the proposed debt options?
B. Repeat Part A assuming that the corporate tax rate is 40 percent.