GreenThumb Greenhouses Inc, currently an unlettered firm, is planning an expansion. They proposed the following options to raise funds for the expansion. Plan A= all equity plan, this includes 2,000,000 common shares will be sold to net company $2.50 per share. Plan B= debt issue of 20-year maturity bonds as well as some additional new equity at the same price as in Plan A. The debt issue will be for $2,000,000 and carry a 9% interest rate. GreenThumb's tax rate is 40% and the company currently has 5,000,000 shares of common stock outstanding.

a) How much capital must be raised for this project?

b) Calculate the indifference EBIT associated with these two plans

c) Calculate the EPS at the indifference EBIT calculated in part b.

d) If the expected EBIT is $800,000 which plan should be chosen? Explain why.

e) The company has decided to change A from issuing 2,000,000 common shares to issuing new preferred shares with a dividend of 3%. Plan B will remain the same. What will be the new indifference EBIT?

Answer rating: 100% (QA)

a For Plan A the total capital must be raised is 2000000 equity shares at the rate of 250 per share ... View the full answer