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?