Ramone and Co. is deciding to go public and are debating whether to issue only stock or stock and debt to

finance their new venture in marketing musical equipment. The total capital to be raised is $25 million.

They can raise all $25 million in equity by issuing 1,000,000 shares at $25 each. Alternatively, they could

issue 500,000 shares at $25 each and borrow the remaining amount by issuing 15-year 12% annual coupon

bonds at par.

a: What is the crossover EBIT point where the EPS will be the same for either financing? Assume a marginal

tax rate of 30%?

b. What will be the EPS if the EBIT is $4,000,000 under both forms of financing?