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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?

Cost Accounting, Accounting

  • Category:- Cost Accounting
  • Reference No.:- M923318

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