Question: a.ABC Corp is considering two alternative capital structure that are summarized in the table below: Option A Option B 6% debt 100,000 200,000 Commons shares

a.ABC Corp is considering two alternative capital structure that are summarized in the table below:

Option A Option B

6% debt 100,000 200,000

Commons shares 50,000 30,000

What is the indifference point in terms of EBIT for the two capital structures?

2.ABC needs to finance its operations for the next year. It can obtain short term financing at 4% and long-term financing at 9%. ABC needs $200,000.

a.Calculate the cost of borrowing using each option.

b.ABC is worried that short term rates could spike. Their economist estimates there is a 25% chance short term rates could spike to 15%. Using the expected value approach which option is better?

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