Question

BNM is comparing different capital structures. Plan A is all equity with 20m (million) shares outstanding. Plan B would result in 14m shares and $150m in debt. Plan C would result in 11m shares and $225m in debt. The interest rate on the debt is 8 percent. Ignoring taxes, compare these plans assuming that expected EBIT is $45m. Of the three plans, the firm will have the highest expected EPS with _____ and the lowest expected EPS with _____.A. Plan A; Plan BB. Plan A; Plan CC. Plan C; Plan AD. Plan B; Plan C

Answer 1

Answer:

C. Leverage increases expected EPS and ROE (but increases their riskiness too)

Explanation:

C. Leverage increases expected EPS and ROE (but increases their riskiness too)

Expected EPS(All-equity Plan A) = $45m/20m = $2.25

Expected EPS(Plan B) = [$45m - ($150m × 0.08)/14m = $2.36

Expected EPS(Plan C) = [$45m - ($225m × 0.08)]/11m = $2.45