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What is the indifference point

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Khan needs to raise $20 million externally. It can sell bonds with a 10 percent coupon rate, or common stock at $40 per share. The firm expects the EBIT to be $19 million with the new assets. It is already paying $1 million interest on the outstanding bonds. It has a tax rate of 30 percent, and 2 million shares of common outstanding. How should the company raise the $20 million? What is the indifference point between the bond and the stock alternative?

- A company is attempting to select between two financing alternatives. Option 1 is to issue an additional $1 million in debt at 8%. The second option is to issue $1 million o common shares at $25/share. The firm currently has $250,000 of 7% debt and 100,000 shares of common outstanding. Its tax rate is 40%.

a. What is the indifference point? (297,500)

b. Graph and label the relevant data.

c. Which option would you choose if the EBIT is projected to be $100,000?

d. Which option would you choose if the EBIT is projected to be $350,000?

Reference no: EM132584772

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