problem: 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 [Suppose a 40 percent marginal tax rate]
Plan one [equity financing] under this plan an additional 5 million shares of common stock will be sold at$10 each.
Plan two [debt financing] $50 million of ten percent 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 extimate the EBIT –EPS indifference point –hint use EBIT =$10million & $25 million.
[C] What happens to the indifference point of the interest rate on debt increases and the common stock sales price remains constant?