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Illustrating the ranges of ebit

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Question: A firm has 1,000,000 common shares outstanding, with a current market value of $12 per share, and $2,000,000 of debentures at 14-percent annual interest. An additional $3,000,000 needs to be raised. The alternatives are to issue 300,000 new shares that would net the firm $I 0 per share or to place an additional 20-year debenture at face value with annual interest payments of 10 percent. Issuing and underwriting expenses can be ignored, and the firm's tax rate is 40 percent. Carry out a break-even analysis, illustrating the ranges of EBIT for which each of the alternatives appears superior in terms of earnings per share.

Reference no: EM131750314

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