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% long-term debt and 2 million common shares at $25 each will be sold.

Ice Lake's marginal tax rate is 40%.

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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