LA Sports Inc. needs to raise $500 million in capital to finance an expansion. A team in the treasury department is working on a financing proposal and is considering the following two alternative financing plans.

Plan 1: All equity financing with the new common shares issued at $20 per share.

Plan 2:  40/60 financing plan with

                 40% financed through the issuance of new corporate bonds at 10% interest rate and

                 60% financed through the issuance of new common shares at $25 per share.

The firm's current capital structure consists of both equity and debt/corporate bond. 

It currently has 30 million common shares outstanding.

The total principal amount of outstanding corporate bond is 200 million and the coupon rate is 9%.

LA Sports Inc. is in the 21 percent corporate tax bracket.

(1) Calculate indifference EBIT.

Answer rating: 100% (QA)

Plan 1 All equity financing To calculate the indifference EBIT for Plan 1 we need to find the EBIT level at which the cost of equity financing is equal to the cost of the alternative financing plan Th... View the full answer