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Indifference level of ebit for the two financing plans

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Jimmy Pesto Company has a current capital structure consisting of $25 million in long-term debt with an interest rate of 8%, $10 million in preferred equity (1 million shares) with an annual dividends of $1 per share, and $100 million in common equity (5 million shares). The firm is considering an expansion plan costing $10 million. The expansion plan can be financed with additional long-term debt at a 9.75% interest rate or the sale of new common stock at $25 per share. The firm's marginal tax rate is 30%.

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

2. If the firm's actual EBIT is expected to be $19 million, which plan should the firm prefers from EPS perspective?

Reference no: EM132661661

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