(Answered) Question a firm with a tax rate of 40 percent has 1000000

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Question: A firm with a tax rate of 40 percent has 1,000,000 common shares outstanding at a current market value of $15 per share. The firm requires $10,000,000 for expansion. Issuing and underwriting expenses can be ignored. The alternatives are:

(i) To issue additional shares to net the firm $ 12.50 per share.

(ii) To issue debentures at face value carrying 8-percent interest.

(iii) To issue preferred shares at $100 each that carry an annual dividend of $6 per share. Provide a break-even diagram and clearly indicate the breakeven points between the various alternatives in terms of earnings per share.

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