AQ&Q has EBIT of $2 million, total assets of $10 million, stockholders’ equity of $4 million, and pretax interest expense of 10 percent.
a. What is AQ&Q’s indifference level of EBIT?
b. Given its current situation, might it benefit from increasing or decreasing its use of debt? Explain.
c. Suppose we are told AQ&Q’s average tax rate is 40 percent. How does this affect your answers to Parts a and b?