The Oakland Shirt Company has computed its indifference level of EBIT to be

$500,000 between an equity financing option and a debt financing option. Interest expense under the debt option is $200,000 and $100,000 under the equity option.

The EBIT for the firm is approximately normally distributed with an expected value of $620,000 and a standard deviation of $190,000.

•a. What is the probability that the equity financing option will be preferred?

b. What is the probability that the firm will incur losses under the debt option? P-9687