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Husky Dudz Inc. is a high end producer of dog clothes for the pets of celebrities. The firm is considering the opening of a new subsidiary in Los Angeles so the firm will be closer to its market. The subsidiary will operate as a separate company in the United States and the firm has a tax rate of 40 percent. The company's financial experts have estimated that EBIT will average $6,000,000 per year. The firm is considering the following financial plans:
Plan A: Issue 2 million shares at $10.00 (net) each.
Plan B: Issue $10 million in 8 percent coupon bonds and finance the balance with equity.
a. Calculate the EBIT/EPS indifference point.
b. How do you know your calculations are correct?
c. What is the significance of this EBIT/EPS indifference point?
d. Which financing plan should the company use?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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