The first (Plan A) is an all common-equity capital structure. $2.4 million dollars would be raised by selling common stock at $10 per common share.
Plan B would involve the use of financial leverage. $1.1 million dollars would be raised by selling bonds with an effective interest rate at 10.6% (per annum), and the remaining $1.3 million would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalization, so no fixed maturity date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis.
A) Find the EBIT indifference level associated with the two financing plans.
B) A detailed financial analysis of the firm's prospects suggests that the long-term EBIT will be above $344,000 annually. Taking this into consideration, which plan will generate the higher EPS?
Plan B would involve the use of financial leverage. $1.1 million dollars would be raised by selling bonds with an effective interest rate at 10.6% (per annum), and the remaining $1.3 million would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalization, so no fixed maturity date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis.
A) Find the EBIT indifference level associated with the two financing plans.
B) A detailed financial analysis of the firm's prospects suggests that the long-term EBIT will be above $344,000 annually. Taking this into consideration, which plan will generate the higher EPS?
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