5. M&M and Stock Value In Problem 4, use M&M Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm? 6. Break-Even EBIT and Leverage [LO1, 2] Destin Corp. is comparing two differ- ent capital structures. Plan I would result in 10,000 shares of stock and $90,000 in debt. Plan II would result in 7,600 shares of stock and $198,000 in debt. The inter- est 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 $48,000. The all-equity plan would result in 12,000 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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