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Which financing option should be pursued

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A firm that wants to raise $15 million has 800,000 common shares outstanding with a current market value of $25, and has $10,000,000 bonds with a 5% annual coupon payment. The firm's tax rate is 40 percent.

Problem (a) The $15 million could also be raised by issuing preferred shares at $100 per share with an annual dividend rate of 10 percent. Issuing and underwriting costs can be ignored. Compute the indifference EBIT between common shares and preferred shares. If expected EBIT is less than the indifference EBIT which financing option should be pursued?

Reference no: EM132718063

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