Higgins currently has $2$ million shares of common stock outstanding that are selling for $$32$ per share. Higgins also has a $$20$ million mortgage bond outstanding that has an $11\%$ coupon rate. Higgins is considering two alternatives to financing a major expansion. Plan A is to sell $$10$ million of additional long$-$term debt with a $12\mathrm{.}5\%$ coupon. Plan B is to sell $200,000$ shares of common stock at $$30$ per share and $$4$ million in long$-$term debt with an $11\mathrm{.}25\%$ coupon.

What is the EBIT indifference level between these two alternatives? Assume the marginal tax rate is $40\%.$

Question $20$Answer

a$.$

$$1,374,000$

b$.$

$$2,650,000$

c$.$

$$11,450,000$

d$.$

$$4,554,000$