Lambdoid Corporation is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Lambdoid would have 200,000 shares of stock outstanding. Under Plan II, there would be 100,000 shares of stock outstanding and $4 million in debt outstanding. The interest rate on the debt is 10% and there are no taxes.
a. If EBIT is $500,000, which plan will result in higher EPS?
b. If EBIT is $3.5 million, which plan will result in higher EPS?
c. What is the break-even EBIT?