Find the ebit indifference level

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Reference no: EM132470244

Plan A is an all common equity structure in which $2.1 million dollars would be raised by selling common stock at $10 per common share.

Plan B would involve the use of financial leverage. $1.3 million dollars would be raised by selling bonds with an effective interest rate of 10.7% (per annum) and the remaining $0.8 million would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be permanent part of the firms capitalization, so no fixed maturity date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis.

Question a. Find the EBIT indifference level associated with the two finance plans

Question b. A detailed financial analysis of the firms prospects suggests that the long-term EBIT will be above $314,000 annually. Taking this into consideration, which plan will generate the higher EPS?

Reference no: EM132470244

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