Kelso Electric is debating between a leveraged and an unleveraged capital structure. The all equity capital structure would consist of 600,000 shares of stock. The debt and equity option would consist of 300,000 shares of stock plus $4,500,000 of debt with an interest rate of 10 percent.
a) What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes
b) If all of your EBIT predictions for the company are above $1,000,000, what is your recommendation?