Question: 10 1 Corp intends to raise 5 million by one of

10+1 Corp. intends to raise $5 million by one of two financing plans:
Plan A: Sell 1,250,000 shares at $4 per share net to the firm.
Plan B: Issue $5 million in tenyear debentures with a 9 percent coupon rate.
The firm expects an EBIT level of $800,000. Currently Big 10 has 100,000 shares outstanding and $2 million of debt with a 5 percent coupon in its capital structure the tax rate is 34 percent.
a. Draw an EBIT/eps graph showing the various levels of EPS and EBIT.
b. What is the EBIT indifference point?
c. When will eps be zero under either alternatives?
d. What type of financing should the firm choose?
e. Suppose under the equity financing option at an EBIT level of $800,000, the firm's P/E ratio is 10; for the debt financing option, the P/E ratio is 7. What should the firm do?

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  • CreatedMarch 27, 2015
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