GreenThumb Greenhouses Inc., currently an un-levered firm, is planning a major expansion program. GreenThumb has proposed the following options to raise funds for the expansion. Plan A is an all equity plan. Under this plan, 2,000,000 common shares will be sold to net the company $2.50 per share. Plan B calls for a debt issue of 20-year maturity bonds as well as some additional new equity at the same price per share as in plan A. The debt issue will be for $2,000,000 and carry a 9 percent interest rate. GreenThumbs tax rate is 40% and the company currently has 5,000,000 shares of common stock outstanding.

a) How much capital must be raised for this project? (1 mark) b) Calculate the indifference EBIT (EBIT*) associated with these two plans. (6 marks) c) Calculate the EPS at the indifference EBIT calculated in part b. (2 marks) d) If the expected EBIT is $800,000, which plan should be chosen? Explain why? (2 marks). e) The company has decided to change Plan A from issuing 2,000,000 common shares to issuing all new preferred shares with a dividend of 3%. Plan B will remain the same. What will be the new indifference EBIT (EBIT*)?

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