Calculate the EPS indifference EBIT* level given the following information. The corporate tax rate is 20 percent. Under a 75-percent D/E ratio, the number of common shares outstanding is 30,000; pre-tax cost of debt is 10 percent; and outstanding debt is $675,000. Under a 30-percent D/E ratio, the number of common shares outstanding is 65,000; pre-tax cost of debt is 6 percent; and outstanding debt is $420,000. Discuss the implication of the indifference EBIT* and indicate which option is better given an EBIT of $125,000.
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