Equity financing and levered financing

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Reference no: EM13769157

Aspen Company is financed with $50 million of 8% debt and $75 million of common equity. The firm has 1 million shares of common stock outstanding. Aspen needs to raise $20 million and is undecided between two possible plans for raising this capital:

Plan A: Equity Financing. Under this plan, common stock will be sold at $100 per share.

Plan B: Levered Financing. Under this plan, half of the capital will be raised with equity at $100 per share and half will be raised by selling 12% coupon bonds.

At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 34% marginal tax rate.

A.) $18.4 million B.) $62.4 million C.) $11.2 million D.) $32 million E.) $12.8 million

Reference no: EM13769157

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