Company A1 intends to raise $3 million by either of two financing plans: Plan A: Sell 100,000

Question:

Company A1 intends to raise $3 million by either of two financing plans:

Plan A: Sell 100,000 shares of stock at $30 net to firm

Plan B: Issue $3 million in long term bonds with a 10 percent coupon

The firm expects an EBIT of $1 million. Currently A1 has 50,000 shares outstanding and no debt in its capital structure.

Its tax rate is 34 percent.

a. What EBIT indifference level is associated with these two proposals?

b. Draw an EBIT/eps graph showing the various levels of eps and EBIT to include the expected EBIT. What should A1 do in this case?

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...