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Calculate the break-even EBIT for the two financing options

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Question - A company's capital structure is made up of 200,000 common shares and $1,000,000 debt at 12 percent interest. The company's tax rate is 40 percent. An additional $500,000 has to be raised, and the following financing alternatives are available:

Common shares: The company can sell additional shares to net $10 a share.

Debt: Debt can be issued at 14 percent.           

Management has advised that they expect EBIT to average $350,000 for the next five years.

Required - Calculate the break-even EBIT for the two financing options. Which financing option would you recommend and why?

Reference no: EM132919584

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