Question
Dagger Company hasa currentcapitalstructure consisting of $100million in long-term debt withaninterest rate of 7.25% and $290million in commonequity(10 millionshares). The firm isconsideringan expansionplancosting $20million.Theexpansion plan
Dagger Company hasa currentcapitalstructure consisting of $100million in long-term debt withaninterest rate of 7.25% and $290million in commonequity(10 millionshares). The firm isconsideringan expansionplancosting $20million.Theexpansion plan can be financedwith additionallong-term debtat an 8.75%interest rateorthesale ofnew common stockat$40pershare. Thefirm's marginal tax rate is 25%.
1. Determine the indifference levelof EBITfor the two financing plans.
2.If the firm's actual EBIT is expected to be $39million, which plan should the firm prefers from EPS perspective?
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International Finance Theory and Policy
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz
10th edition
978-0133425895, 133425894, 978-0133423631, 133423638, 978-0133423648
