SNC Inc. is considering a large investment of $20,000,000 in a new project. The company currently has $15,000,000 of 6% coupon bonds and 2,000,000 common shares outstanding. The tax rate is 40%. Discussions with an investment banker have assured the firm that the following options are feasible:

o Option 1: Sell $20,000,000 worth of common stock at $50 per share.

o Option 2: Issue $10,000,000 worth of 8% coupon bonds with a 30-year maturity, in addition to $10,000,000 worth of common stock at $50 per share.

a) Calculate the EBIT indifference point for the 2 options.

b) What is the EPS at the EBIT indifference point? At EBIT levels above the EBIT indifference point, which plan would you favour?