Planning a major expansion program requiring

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Reference no: EM131338640

Expo Inc. is planning a major expansion program requiring $5,000,000 in financing.Expo may sell bonds with an 8% coupon rate or sell 200,000 shares of common stock to get the needed funds. After the expansion there is a 30% probability of EBIT (Earnings Before Interest and Taxes) being $2 million, a 50% probability of it being $3 million and a 20% probability of it being $4 million. The following data was taken from the firm’s pre-expansion income statement:

Interest expense $100,000

Tax Rate 40%

Common shares outstanding 300,000

1. What level of EBIT would yield the same EPS for the stock and debt alternatives?

2. What EPS corresponds to this level of EBIT?

Reference no: EM131338640

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