Question: Ice Lake Electronics is considering an R&D project to develop a new chip technology. The project is expected to require $130 million in capital. The

Ice Lake Electronics is considering an R&D project to develop a new chip technology. The

project is expected to require $130 million in capital. The company expects the new

technology will bring EBIT of $25 million per year. At this time, the company is considering

the following two financing plans:

Plan 1: Equity financing. Under this plan, 5 million common shares will be sold at $26 each.

Plan 2: Debt-equity financing. Under this plan, $80 million of 16 percent long-term debt

and 2 million common shares at $25 each will be sold.

Ice Lake's marginal tax rate is 40 percent.

a)

What is the EBIT level at which Ice Lake is indifferent between the two financing

plans?

b)

Considering the information provided about the R&D project in the question, which

financing plan do you recommend to Ice Lake's management

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