2. The capital structure of the Hygrade Company is as follows:

6% bonds $2,000,000

Common stock, 100,000 shares 1,000,000

Retained Earnings 4,000,000

Total long-term financing sources $7,000,000

The company is considering a $3,000,000 expansion program that it can finance with either (1) common stock sold to net the company $60 per share; (2) 8% bonds, $100,000 sinking fund, or (3) 8% preferred stock. The company expects EBIT after the expansion program to be $1,400,000. The tax rate is 40%.

A. At what EBIT would the EPS be the same for the common stock alternative and the bond alternative (this is the financial break-even between the common stock and bond alternatives)?

B. What is the financial break-even between common stock and preferred stock?

C. What is the financial break-even between bonds and preferred stock?