The Albany Company has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8% coupon rate). The company is planning a major expansion and is undecided between two financing plans.

Plan A: Equity financing.Under this plan, an additional 2.5 million shares of common stock will be sold at $15 per share.

Plan B: Debt financing.Under this plan, $37.5 million of 10% long-term debt will be sold.

At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 40% marginal tax rate.

$37 million

$33.9 million

40 million

$6.75 million

$30.75 million