Question 9 (10 points)

Riverside Planning's EBIT for the next year is approximately normally distributed with an

expected value of $890,000 and a standard deviation of $755,000. Riverside Planning has

two financing options to consider. Under the equity plan, the firm will have interest expense

of $185,000, and under the debt plan, the firm will have interest expense of $425,000.

Riverside has computed its indifference level between the two financing plans to be EBIT of

$650,000.

a)

What is the probability that the equity financing option will be preferred?

b)

What is the probability that the firm incur losses under the equity plan?

c)

What is the probability that the firm incur losses under the debt plan?