Reference no: EM132804303
The United Preschools, Inc. has a current capital structure that consists of common equity, long-term debt and preferred stock, see below for the detailed information:
Market value of common equity = 35 million, with 3.5 million shares outstanding;
Total book value of long-term debt = 10 million, with a coupon rate of 12 percent;
Total book value of preferred stock = 5 million,
The par value per share of preferred stock = $50 and the preferred dividend payout ratio = 10%.
The company is planning a major plant expansion and is undecided between the following two financing plans:
Equity financing: Sale of 500,000 shares of common stock at $10 each.
Debt financing: Sale of 100,000 shares of common stock at $10 each and $4 million of 12.5 percent long-term bonds.
Calculate the EBIT-EPS indifference point. Assume the marginal tax rate is 21%.
(1) What is the indifference EBIT?
(2) What is the indifference EPS?
(3) If the project is expected to generate the EBIT of $7 million, which financing plan should the firm take?
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