The Oakland Shirt Company has computed its indifference level of EBIT to be $500,000 between an equity financing option and a debt financing option. Interest expense under the debt option is $200,000 and interest expense under the equity option is $100,000. The EBIT for the firm is approximately normally distributed with an expected value of $620,000 and a standard deviation of $190,000.
a. What is the probability that the equity financing option will be preferred to the debt financing option?
b. What is the probability that the firm will incur losses under the debt option?