LA Sports Inc. needs to raise $500 million in capital to finance an expansion. A team in the treasury department is working on a financing proposal and is considering the following two alternative financing plans.

Plan 1: All equity financing with the new common shares issued at $20 per share.

Plan 2: 40/60 financing plan with

40% financed through the issuance of new corporate bonds at 10% interest rate and

60% financed through the issuance of new common shares at $25 per share.

The firms CURRENT capital structure consists of both equity and debt/corporate bond.

It currently has 30 million common shares outstanding.

The total principal amount of outstanding corporate bond is 200 million and the coupon rate is 9%.

LA Sports Inc. is in the 21 percent corporate tax bracket.

(1) Calculate indifference EBIT.

(2) Calculate indifference EPS.

(3) If the project is expected to generate $100 million EBIT, which plan would you recommend?

A. Plan 1

B. Plan 2

(4) Compare these two financing plans, which plan might send out a stronger positive signal and result in a more favorable market reaction upon the announcement? Assume there are no other corporate announcements.

A. Plan 1

B. Plan 2