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 $2,000,000. The expansion can be financed with new equity (sold to net the company $10 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 $350,000 with a standard deviation of $100,000, what is the probability that the debt financing alternative will produce higher earnings than the equity alternative? (EBIT is normally distributed.)

• If the debt alternative is chosen, what is the probability that the company will have negative earnings per share in any period?