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 bonds. The company

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

stock at $60 a share (option 1), straight bonds at 8 percent interest (option 2), preferred

stock at 7 percent (option 3), and half common stock at $60 per share and half 8 percent

bonds (option 4).

a. For an expected EBIT level of $1 million after the expansion program, calculate the

earnings per share for each of the alternative methods of financing. Assume a tax rate

of 50 percent.

b. Construct an EBIT-EPS chart. Calculate the indifference points between alternatives.

What is your interpretation of them?