University Technologies, Inc (UTI) has a current capital structure consisting of 10 million shares of common stock , $200 million of first mortgage bonds with a coupon interest rate of 13 percent, and $40 million of preferred stock paying a 5 percent dividend In order to expand into Asia, UTI will ...

University Technologies, Inc. (UTI) has a current capital structure consisting of 10 million shares of common stock

Question:

University Technologies, Inc. (UTI) has a current consisting of 10 million shares of , $200 million of first-mortgage bonds with a interest rate of 13 percent, and $40 million of preferred stock paying a 5 percent dividend. In order to expand into Asia, UTI will have to undertake an aggressive capital outlay campaign, expected to cost $200 million. This expansion can be financed either by selling 4 million new shares of at a price of $50 per share or by the sale of $200 million of subordinated at a pretax interest rate of 15 percent.
The company’s tax rate is 40 percent.
a. Compute the EBIT-EPS indifference point between the equity and debt financing alternatives.
b. If UTI expects next year’s EBIT to be $150 million with a standard deviation of $20 million, what is the probability that the equity financing option will produce higher earnings per share than the debt financing option? (Assume that EBIT is normally distributed).

Debentures
Debenture DefinitionDebentures are corporate loan instruments secured against the promise by the issuer to pay interest and principal. The holder of the debenture is promised to be paid a periodic interest and principal at the term. Companies who... Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...