Ipsy Dipsy Preschools Inc. has a capital structure that consists of 60% common equity (2.0 million shares), 30% longterm debt ($10 million with 12% coupon), and 10% preferred stock ($50 par value with $4.75 dividend). The company is planning a major plant expansion and is undecided between the following two financing plans: 1) Equity financing: Sale of 400,000 shares of common at $10 each 2) Debt financing: Sale of $4 million of 12.5 percent long-term bonds Calculate the EBIT-EPS indifference point, assuming the marginal tax rate is 40%.

Question 8

Answer

a. $4.728 million

b. $4.253 million

c. $3.051 million

d. $3.654 million