Hi-Grade Regulator Company currently has 100,000 shares of common stock outstanding with a market price of $60

Question:

Hi-Grade Regulator Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has $2 million in 6 percent bonds. The company is considering a $3 million expansion program that it can finance with all common stock at $60 a share (option 1), straight bonds at 8 percent interest (option 2), preferred stock at 7 percent (option 3), and half common stock at $60 per share and half 8 percent bonds (option 4).

a. For an expected EBIT level of $1 million after the expansion program, calculate the earnings per share for each of the alternative methods of financing. Assume a tax rate of 50 percent.

b. Construct an EBIT-EPS chart. Calculate the indifference points between alternatives. What is your interpretation of them?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...