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Discuss on to issue of new debt and break even analysis

A firm has no outstanding debt and a total market value of $200,000. Earnings before interest and taxes (EBIT) are projected to be $25,000 if economic conditions are normal. If there is a strong expansion, EBIT is expected to increase to $35,000, and if there is a recession the firm EBIT is expected to decline to $10,000. The firm is considering a $70,000 debt issue with a 6 percent interest rate, where the proceeds will be used to repurchase shares of stock. There are currently 4,000 shares outstanding. Ignore taxes.

What is the break-even level of EBIT, and what does it imply regarding whether or not the firm should go ahead with the new debt issue?

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M9162691

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