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Indifference level of ebit for the two financing plans

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Reference no: EM132656396

Dagger Company has a current capital structure consisting of $100 million in long-term debt with an interest rate of 7.25% and $290 million in common equity (10 million shares). The firm is considering an expansion plan costing $20 million. The expansion plan can be financedwith additional long-term debt at an 8.75% interest rate or the sale of new common stock at $40 per share. The firm's marginal tax rate is 25%.

1. Determine the indifference level of EBIT for the two financing plans.

2. If the firm's actual EBIT is expected to be $39 million, which plan should the firm prefers from EPS perspective?

Reference no: EM132656396

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