Silver Shoes Inc. has 850,000 shares outstanding. The shares are currently selling in the market for...

Transcribed Image Text:

Silver Shoes Inc. has 850,000 shares outstanding. The shares are currently selling in the market for $10.00. The firm also has $1,750,000 in debt with a coupon rate of 7%. The firm also has $615,000 of preferred shares with a 8% cash dividend. The firm is considering a new project that would require an investment of $1,725,000. The firm has a marginal tax rate of 40% To raise the additional $1,725,000 the firm is considering two options: Option 1: Issue new bonds at par with the coupon rate of 7% Option 2: Issue new common shares at $10.00/share a) What level of EBIT would yield the same EPS for each option? (indifference point) b)If the EBIT of the firm is expected to b $1,900,000 which option should they choose to maximize EPS? Silver Shoes Inc. has 850,000 shares outstanding. The shares are currently selling in the market for $10.00. The firm also has $1,750,000 in debt with a coupon rate of 7%. The firm also has $615,000 of preferred shares with a 8% cash dividend. The firm is considering a new project that would require an investment of $1,725,000. The firm has a marginal tax rate of 40% To raise the additional $1,725,000 the firm is considering two options: Option 1: Issue new bonds at par with the coupon rate of 7% Option 2: Issue new common shares at $10.00/share a) What level of EBIT would yield the same EPS for each option? (indifference point) b)If the EBIT of the firm is expected to b $1,900,000 which option should they choose to maximize EPS?

Answer rating: 100% (QA)

SOLUTION a To find the level of EBIT that yields the same earnings per share EPS for each option we ... View the full answer