Question
High Sky Inc. a hot-air balloon manufacturing firm, currently has the following simplified balance sheet: Assets Liabilities and Capital Total assets $800,000 Bonds (9% interest)
High Sky Inc. a hot-air balloon manufacturing firm, currently has the following simplified balance sheet:
Assets | Liabilities and Capital | |||||
Total assets | $800,000 | Bonds (9% interest) | $500,000 | |||
Common stock at par ($4), 50,000 shares | $200,000 | |||||
outstanding | ||||||
Contributed capital in excess of par | $50,000 | |||||
Retained earnings | $50,000 | |||||
Total liabilities and capital | $800,000 | |||||
The company is planning an expansion that is expected to cost $1,750,000. The expansion can be financed with new equity (sold to net the company $11 per share) or with the sale of new bonds at an interest rate of 13 percent. (The firms marginal tax rate is 40%.) Use Table V to answer the questions.
Compute the indifference point between the two financing alternatives. Round your answer to the nearest dollar. $
If the expected level of EBIT for the firm is $250,000 with a standard deviation of $60,000, what is the probability that the debt financing alternative will produce higher earnings than the equity alternative? (EBIT is normally distributed.) Round your answer to two decimal places. 10.123% would be entered as 10.12 %
If the debt alternative is chosen, what is the probability that the company will have negative earnings per share in any period? Round your answer to two decimal places. %
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