What is the breakeven ebit for both sources of capital

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XYZ Corporation is planning to raise an additional $30 million in capital, either via 240,000 shares of common stock at $125 per share net proceeds, or via 300,000 shares of 9% percent preferred stock. Current earnings are $12.50 per share on one million shares outstanding. $2,500,000 is paid annually on existing debt, and dividends on existing preferred stock amount to $1,500,000 per year. The current market price of common stock is $140 per share. The firm has a dividend policy of paying $8 per share on common stock which it intends to keep. Assume a tax rate of 46%.

Problem 1: What is the least amount of incremental earnings from the planned expansion required to meet the incremental cost of capital from either source?

Problem 2: What is the breakeven EBIT for both sources of capital?

Reference no: EM133000124

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