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Analysis of Capital Structure Plans

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Analyze the following capital structure plans. You will use the EBIT-EPS analysis to evaluate the two plans. One plan is all equity and one has debt and equity.

Plan Plan 1: All Equity Plan 2: Some Debt
Shares of Equity 80,000 50,000
Debt 0 $2,000,000
Cost of debt 0 12%
Interest Expense 0 $240,000
Tax Rate 34% 34%

Determine the EBIT indifference point.
Discuss the implications of EBIT above and below this point.
Please submit your backup in Excel or other supporting documentation showing how answers were reached.

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Solution Summary

This solution analyzes capital structure plans.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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