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Plot the two financing plans on a set of EBIT-EPS axes

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Question - Newlin Electronics is considering additional financing of $10,000. It currently has $50,000 of 12% (annual interest) bonds and 10,000 shares of common stock outstanding. The firm can obtain the financing through a 12% (annual interest) bond issue or through the sale of 1,000 shares of common stock.

The firm has a 40% tax rate.

a. Calculate two EBIT-EPS coordinates for each plan by selecting any two EBIT values and finding their associated EPS values.

b. Plot the two financing plans on a set of EBIT-EPS axes.

c. On the basis of your graph in part b, at what level of EBIT does the bond plan become superior to the stock plan?

Reference no: EM131911338

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