Gabe's Market is comparing two different capital structures.Plan I would result in 15,000 shares of stock and $210,000 in debt.Plan II would result in 13,000 shares of stock and $252,000 in debt.The interest rate on the debt is 8 percent.Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $52,000.The all-equity plan would result in 25,000 shares of stock outstanding.Of the three plans, the firm will have the highest EPS with _____ and the lowest EPS with ____.
A)Plan I; Plan II
B)Plan II; the all-equity plan
C)Plan II; Plan I
D)Plan I; the all-equity plan
E)the all-equity plan; Plan I

Question

Quizplus · Accepted Answer

Plan II will have the highest EPS because it has fewer shares and higher debt, which increases leverage and EPS when EBIT is high. The all-equity plan will have the lowest EPS because it has the most shares outstanding, diluting earnings per share.

Gabe's Market Is Comparing Two Different Capital Structures