Landsing Inc. currently has $1, 500,000 of 7% coupon bonds and 50,000 common shares outstanding. The tax rate is 40%. Landsing is considering a new project which requires an investment of $2,000,000.
The company is considering two options for raising the capital:
Option 1: Sell $2,000,000 worth of common stock at $50 per share
Option 2: Issue $1, 500,000 of 8% coupon bonds with a 15 year maturity, and $500,000 of common stock at $50 per share.
a) Calculate the EBIT indifference point for the two options.
b) What is the EPS at the EBIT indifference point?
c) At EBIT levels above the EBIT indifference point which option is better?