Galaxy Products is comparing two different capital structures, an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, Galaxy would have 178,500 shares of stock outstanding. Under Plan II, there would be 71,400 shares of stock outstanding and $1.79 million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes. The projected EBIT is $280,000. Which capital structure plan would you prefer, if you were a shareholder in the firm? Support your response with relevant computations.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Galaxy Products is comparing two different capital structures, an all-equity 
plan (Plan I) and a levered plan (Plan II). Under Plan I, Galaxy would have 
178,500 shares of stock outstanding. Under Plan II, there would be 71,400 
shares of stock outstanding and $1.79 million in debt outstanding. The interest 
rate on the debt is 10 percent and there are no taxes. The projected EBIT is 
$280,000. Which capital structure plan would you prefer, if you were a 
shareholder in the firm? Support your response with relevant computations.

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