A firm has 500,000 common shares outstanding and $10 million debt at 10% interest rate. The corporate tax rate is 40%. An additional $3 million has to be raised, and the following financing alternatives are under consideration:

1. Common Shares: the common stock trade at $32 per share on the market but the company can sell additional shares to net $30 per share.

2. Debt: debt can be issued at 10% annual interest rate

Required:

a) Do an EBIT/EPS analysis under these two levels of EBIT to determine which financing alternative is the best: (a) $2.5 million and (b) $3.5 million.

b) Compute and graph the indifference point the breakeven EBIT between debt and common share alternatives and explain the significance of this point.