Newlin Electronics is considering additional financing of $10,000. It currently has $50,000 of 12% (annual interest) bonds and 10,000 shares of common stock outstanding. The firm can obtain the financing through a 12% (annual interest) bond issue or through the sale of 1,000 shares of common stock. The firm has a 40% tax rate.
a. Calculate two EBIT–EPS coordinates for each plan by selecting any two EBIT values and finding their associated EPS values.
b. Plot the two financing plans on a set of EBIT–EPS axes.
c. On the basis of your graph in part b, at what level of EBIT does the bond plan become superior to the stock plan?