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Computation of EBIT - mathermatically, EPS indifference point, graphically.

This company has a present capital structure consisting of common stock (10million shares) the company is planning a major expansion. At this time the company is undecided between the following two financial plans (assume a 40% marginal tax rate)

Plan 1 (equity financing) under this plan an additional 5 million shares of common stock will be sold at$10 each.

Plan 2 (debt financing)$50 million of 10% long term debt will be sold.

One piece of information the company desires for it decision analysis is an EBIT -EPS analysis

a) Compute the EBIT-EPS indifference point

b) Graphically determine the EBIT -EPS indifference point -hint use EBIT =$10million and$25 million.

c) What happens to the indifference point of the interest rate on debt increases and the common stock sales price remains constant?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9160606

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