National Value Foods Company (NVFC) is considering opening a new wholly owned subsidiary in Booneville. To finance

Question:

National Value Foods Company (NVFC) is considering opening a new wholly owned subsidiary in Booneville. To finance this investment, NVFC is considering two financing plans. The first alternative is to sell 600,000 shares of common stock at $20 each. The second plan is to sell 200,000 shares of common stock at $20 each and $8 million of 10 percent long-term debt.

a. If NVFC has a marginal tax rate of 40 percent, what is the EBIT-EPS indifference point for this investment?

b. NVFC’s expected level of EBIT from this division is $1.0 million with a standard deviation of $400,000. If the firm uses the second financing plan, what is the chance of having unfavorable financial leverage?

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...