h

Question 4 ABC is not in debt. Its total capital is made up of 1M shares outstanding, at $ 10 per share. Having detected new profitable projects, requiring a total initial investment of $ 10 million, she is looking for the best way to finance them. It has the choice between issuing new shares, or borrowing at an annual rate of 14%. Assuming a 45% tax rate: A) Analyze the effect of each financing method on the company's EPS. (Make a graphical and algebraic analysis showing the point of indifference between the two funding methods and give your recommendation). B) Suppose that there is also the possibility of financing itself by preferred share yielding a preferred dividend of 9% per year. Evaluate this possibility against the other two. C) If the company predicts that EBIT next year will be $ 5M +/- 15%, what will be the EPS according to each of the three financing methods and according to each scenario?