Calculate the EBIT-EPS indifference point.
Morton Industries is considering opening a new subsidiary in Boston, to be operated as a separate company. The company's financial analysts expect the new facilities average EBIT level to be $6 million per year. At this time the company is considering the following two financing plans (40% tax rate):
Plan 1 (equity financing). Under this plan, an additional 2 million shares of common stock will be sold at $10 each
Plan 2 (debt financing). Under this plan, $10 million of 12% long term debt and 1 million common shares at $10 each will be sold.
A. Calculate the EBIT-EPS indifference point.
B. Calculate the expected EPS for both financing plans
C. What factors should the company consider in deciding which financial plan to adopt?
D. Which plan do you recommend?
E. Suppose they adopt plan 2 and the Boston facility initially operates at an annual EBIT level of $6 million. What is the time interest earned ratio?