Absolutely Inc. is expecting to raise $5 million either through the issue of stock or bonds. It currently has $1,000,000 in debt paying interest of 10%. If it issues new bonds, it will have to pay a coupon of 12% annually. Conversely, it could issue shares at $40 each. The current number of shares outstanding is 400,000. The marginal tax rate is 35%. 

At what EBIT will the two forms of financing, i.e. between stocks and bonds, be the same, i.e. have the same EPS?

Answer rating: 100% (QA)

ANSWER To determine the EBIT at which the EPS will be the same for the two forms of financing we need to calculate the EPS under each scenario and the... View the full answer