10+1 Corp. intends to raise $5 million by one of two financing plans: Plan A: Sell 1,250,000...

Question:

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 ten-year 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?

Debentures
Debenture DefinitionDebentures are corporate loan instruments secured against the promise by the issuer to pay interest and principal. The holder of the debenture is promised to be paid a periodic interest and principal at the term. Companies who... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...