Geoff's Golf Clubs is considering purchasing a small firm in the same line of business. The purchase would be financed by the sale of common stock or a bond issue. The financial manager needs to evaluate how the two alternative financing plans will affect the earnings potential of the firm. Total financing required is $4.5 million. The firm currently has $20 million of 12% bonds and 600,000 common shares outstanding. The firm can arrange financing of the $4.5 million through a 14% bond issue or the sale of 100,000 shares of common stock. The firm has a 40 percent tax rate.

a) If EBIT is expected to be $5 million, which plan will result in higher EPS?

b) If EBIT is expected to be $8 million, which plan will result in higher EPS?

c) Calculate the indifference level of EBIT between the two plans.