Hi Grade Regulator Company currently has 100,000 shares of common stock outstanding with a market price of 60 per share. It also has $2 million

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Hi Grade Regulator Company currently has 100,000 shares of common stock outstanding

with a market price of 60 per share. It also has $2 million in 6 percent debt. The company

is considering a $3 million expansion program that it can finance with (1) all common

stock at $60 a share. (2) Straight bonds at 8 percent interest, (3) preferred stock at 7 percent,

or (4) half common stock at 460 per share and half 8 percent bonds.

(i) For a hypothetical EBIT level of $1 million after the expansion program, calculate the

earning per share for each of the alternative methods of financing. Assume a

corporate tax rate of 50 percent.

(ii) Construct an EBIT-EPS chart. What are the indifference points between alternatives?

What is your interpretation of them?