The Euclid Corporation has a present capital structure consisting of 100 million shares of common stock. Euclid is considering an expansion program. Two alternative financing plans are under consideration:

■ Plan 1: Equity financing. Sale of 10 million additional shares of common stock at $15 per share

■ Plan 2: Debt financing. Sale of $150 million of 12 percent long-term debt (The firm’s marginal tax rate is 40 percent.)

a. Determine the indifference level of EBIT between the two financing plans.

b. Suppose that Euclid’s EBIT is normally distributed with an expected value of

$250 million and a standard deviation of $200 million. If the debt alternative is chosen, determine the probability that Euclid will have negative EPS.

c. Determine the probability that the debt financing alternative will produce higher earnings than the equity alternative. P-9687