Meow Dudz Inc. is a high end producer of cat clothes for the pets of celebrities. The firm is considering the opening of a new subsidiary in Los Angeles so the firm will be closer to its market. The subsidiary will operate as a separate company in the United States and the firm has a tax rate of 40 percent. The companys financial experts have estimated that EBIT will average $7,000,000 per year. The firm is considering the following financial plans:

Plan A: Issue 2 million shares at $10.00 (net) each.

Plan B: Issue $10 million in 8 percent coupon bonds and finance the balance with equity.

a. Calculate the EBIT/EPS indifference point.

b. How do you know your calculations are correct?

c. What is the significance of this EBIT/EPS indifference point?