Jenkins Products has a current capital structure that consists of $50 million in long-term debt at an

Question:

Jenkins Products has a current that consists of $50 million in long-term debt at an interest rate of 10 percent and $40 million in common equity (10 million shares). The firm is considering an expansion program that will cost $10 million.
This program can be financed with additional long-term debt at a 13 percent rate of interest, preferred stock at a cost of 14 percent, or the sale of new at $10 per share. The firm’s marginal tax rate is 40 percent.
a. Compute the indifference point level of EBIT between the debt financing option and the option.
b. Compute the indifference point level of EBIT between the option and the preferred stock option.
c. Is there an indifference point between the debt and preferred stock options? Why or why not?

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... 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...