Hudson co. now has an investment plan which needs 6 million dollars. The company has two financing proposals.

Plan A is to borrow $1.2 million at 10% and $4.8 million will need to sell stocks at $40 per

common share. Plan B would involve a higher financial leverage. $2 million would be raised

by selling bonds with an interest rate of 10% and the remaining $4 million would be raised by

selling common stock at the $40 price per share. The corporate tax rate is 25%.

1) Find the EBIT indifference level associated with the two financing plans.

2) If a detailed financial analysis project that long-term EBIT will be in the range of

$800,000 to $1 million annually, which plan will generate higher EPS?

3) If the fixed cost is $600,000, please calculate DOL, DFL and DCL at the point of EBIT

being $1 million under plan B.