The LP company has $$10$ million in assets, $80\%$ financed by debt and $20\%$ financed by common stock.

The interest rate on the debt is $15\%,$ and the stock book value is $$10$ per share. LP is considering two

financing plans for an expansion to $$15$ million in assets. Under plan $A,$ the debt$-$to$-$total$-$asset ratio will

be maintained, but new debt will cost $18\%.$ New common stock will be sold at $$10$ per share. Under

plan $B,$ only new common stock at $$10$ per share will be issued. The tax rate is $40\%.$

a$.$ Calculate the EBIT$/$EPS indifference point. $(6$ marks$)$

b$.$ If EBIT is expected to be $15\%$ of total assets, compute the EPS under the two expansion alternatives?

$(3$ marks$)$

c$.$ Would you have expected the results you get in part $b$ from your calculation of EBIT indifference in

part a$?$ Briefly explain. $(1$ marks$)$

d$.$ Instead of Plan B $($raising new financing with common shares$),$ if the company decided they should

raise only half the amount needed by issuing common shares at $$10$ each and finance the remainder

of the project with $4\%$ preferred shares, what would the indifference point be$?(5$ marks$)$