Reference no: EM131923777

1) Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity. The firm has 500,000 shares of common stock outstanding. Sand Key is planning a major expansion and will need to raise $15 million. The firm must decide whether to finance the expansion with debt or equity. If equity financing is selected, common stock will be sold at $75 per share. If debt financing is chosen, 6% coupon bonds will be sold. The firm's marginal tax rate is 34%. Determine the level of operating income at which Sand Key would be indifferent between debt financing and equity financing.

$6,200,000

$4,625,000

$5,150,000

$6,725,000

$5,675,000

2) Sand Key Development Company estimates that it will generate an operating income of $7.25 million. Which financing option should Sand Key use?

The equity financing option.

The debt financing option.

The firm should abandon plans for expansion.

Sand Key is indifferent between the two options.

We don't have enough information to answer this.