Hi-Grade Regulator Company currently has 100,000 shares of common stock outstanding with a market price of $60 per share. It also has $2 million in 6 percent bonds. The com- pany is considering a $3 million expansion program that it can finance with all common stock at $60 a share (option 1), straight bonds at 8 percent interest (option 2), preferred stock at 7 percent (option 3), and half common stock at $60 per share and half 8 percent bonds (option 4).
a. For an expected EBIT level of $1 million after the expansion program, calculate the earnings per share for each of the alternative methods of financing. Assume a tax rate of 50 percent.
b. Construct an EBIT-EPS chart. Calculate the indifference points between alternatives. What is your interpretation of them?