Question: Your company is considering an all equity capital structure with 2.5 million shares @20$/share or one with 27.5 million$ in debt @8% interest and 1.25

Your company is considering an all equity capital structure with 2.5 million shares @20$/share or one with 27.5 million$ in debt @8% interest and 1.25 million shares @ 18$/share. Corporate taxes are 30%.

a) Graph EPS against EBIT for these alternatives plot the indifference point and intercepts. Check that your indifference EBIT has the same EPS for both plans.

b) Calculate the financial leverage for both plans at EBIT 5 million$ and 4 million$. Check your answer using the elasticity definition of financial leverage by calculating EPS at EBIT of 4 and 5 million$

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