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.
One piece of information the company desires for its decision analysis is and EBIT-EPS analysis.
[A] Compute the EBIT-EPS indifference point.
[B] Make a graph determine the EBIT-EPS indifference point.
Suggestion: Use EBIT = $10 million and $25 million
[C] What happens to indifference point if the interest rate on debt increases & the common stock sale price remains constant?
[D] What happens to indifference point if the interest rate on debt remains constant and the common stock sales price increases?