Discussion: EBIT Indifference Level
Plan 1 is an all common equity structure in which $2.1 million dollars would be raised by selling common stock at $10 per common share.
Plan 2 would involve the use of financial leverage. $1.3 million dollars would be raised by selling bonds with an effective interest rate of 10.7% (per annum) and the remaining $0.8 million would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be permanent part of the firms capitalization, so no fixed maturity date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis.
i. Find the EBIT indifference level associated with the two finance plans.
ii. A detailed financial analysis of the firms prospects suggests that the long-term EBIT will be above $314,000 annually. Taking this into consideration, which plan will generate the higher EPS?
The response should include a reference list. One-inch margins, Using Times New Roman 12 pnt font, double-space and APA style of writing and citations.