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Taylor Corp 800 shares

Price: $2.50


Break-Even EBIT and Leverage Taylor Corp. is comparing two different
capital structures. Plan I would result in 800 shares of stock and $9,000 in debt.
Plan II would result in 700 shares of stock and $13,500 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 $8,000. The all-equity plan would result in 1,000 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 of EBIT for each plan as compared
to that for an all-equity plan? Is one higher than the other? Why?
c. Ignoring taxes, when will EPS be identical for Plans I and II?
d. Repeat parts (a), (b), and (c) assuming that the corporate tax rate is 40
percent. Are the break-even levels of EBIT different from before? Why or
why not?

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