Computing the indifference level of EBIT between these two alternatives.
Moon and Chittenden are considering a new Internet venture to sell used textbooks. The project requires $300,000 in financing. Two alternatives have been proposed:
Plan 1 (Common equity financing). Sell 30,000 shares of stock will be sold at net price of $10 each
Plan 2 (Debt equity financing) Sell a combination of 15,000 shares of stock at a net price of $10 per share and $150,000 of long term debt at a pretax interest rate of 12%
Tax rate is 40%
A. Compute the indifference level of EBIT between these two alternatives
B. If the firm's EBIT next year has an expected level of $25,000, which plan would you recommend assuming maximizing EPS is a valid objective?