Geler co. now has an investment plan which needs 8 million dollars. The company has two...

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Geler co. now has an investment plan which needs 8 million dollars. The company has two financing proposals. Plan A is to borrow $2million at 10% and $6 million will need to sell stocks at $40 per common share. Plan B would involve a higher financial leverage. $4 million would be raised by selling bonds with an interest rate of 10% and the remaining $4 million would be raised by selling common stock at the $40 price per share. The corporate tax rate is 25%. (1) Find the EBIT indifference level associated with the two financing plans. (2) If a detailed financial analysis project that long-term EBIT will be in the range of $1 million to 1.5 million annually, which plan will generate higher EPS? (3) If the fixed cost is $500,000, please calculate DOL, DFL and DCL at the point of EBIT being $1 million under plan B. Geler co. now has an investment plan which needs 8 million dollars. The company has two financing proposals. Plan A is to borrow $2million at 10% and $6 million will need to sell stocks at $40 per common share. Plan B would involve a higher financial leverage. $4 million would be raised by selling bonds with an interest rate of 10% and the remaining $4 million would be raised by selling common stock at the $40 price per share. The corporate tax rate is 25%. (1) Find the EBIT indifference level associated with the two financing plans. (2) If a detailed financial analysis project that long-term EBIT will be in the range of $1 million to 1.5 million annually, which plan will generate higher EPS? (3) If the fixed cost is $500,000, please calculate DOL, DFL and DCL at the point of EBIT being $1 million under plan B.

Answer rating: 100% (QA)

To analyze the financing plans we need to calculate the EBIT indifference level compare the EPS for the given range of EBIT and calculate the degree o... View the full answer