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problem: Emco Products has a present capital structure consisting only of common stock [10 million shares].  The firm is planning a major expansion. At present, the firm is undecided between the following two financing plans [Suppose tax rate is 40%].

1st Plan (equity financing):  Under this plan, an additional 5 million shares of common stock will be sold at $10 each

2nd Plan (debt financing): Under this plan, $50 million of 10 percent long term debt will be sold.

[A] Compute EBIT-EPS indifference point.

[B] Compute expected EPS for both financing plans

[C] What factors should the company consider in deciding which financial plan to adopt?

[D] Which plan do you recommend?

[E] Assume they adopt plan 2nd & Boston facility initially operates at an yearly EBIT level of $6 million. Determine the time interest earned ratio?

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  • Category:- Cost Accounting
  • Reference No.:- M923324

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