Reference no: EM132955513
Question - Hi-Grade Regulator Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has $2 million in 6 percent bonds. The company is considering a $3 million expansion program that it can finance with all common stock at $60 a share (option 1), straight bonds at 8 percent interest (option 2), preferred stock at 7 percent (option 3), and half common stock at $60 per share and half 8 percent bonds (option 4).
a. For an expected EBIT level of $1 million after the expansion program, calculate the earnings per share for each of the alternative methods of financing. Assume a tax rate of 50 percent.
b. Construct an EBIT-EPS chart. Calculate the indifference points between alternatives. What is your interpretation of them?
c. Hi-Grade Regulator Company (see Problem 6) expects the EBIT level after the expansion program to be $1 million, with a two-thirds probability that it will be between $600,000 and $1,400,000.
d. Which financing alternative do you prefer? Why?
e. Suppose that the expected EBIT level was $1.5 million and that there is a two-thirds probability that it would be between $1.3 million and $1.7 million. Which financing alternative would you prefer? Why?
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