Hammel Corporation Is Comparing Two Different Capital Structures, an All-Equity

question 44

Multiple Choice

Hammel Corporation is comparing two different capital structures, an all-equity plan and alevered plan. Under the all-equity plan, Hammel would have 80,000 shares of stock outstanding.Under the levered plan, there would be 50,000 shares outstanding and $300,000 in debtoutstanding. A share of stock is valued to be $10 regardless of the plan. The interest rate on the debt is 8%. Ignoring taxes, at EBIT equal to $100,000, shareholders of Hammel Corporation would

• A) prefer the levered plan.
• B) be indifferent to which plan is selected.
• C) prefer the all-equity plan.
• D) which plan is better cannot be determined with the information provided