Roberts AB is trying to determine the best way to finance a proposed investment of 10 million. There are two options. Plan 1 means that the investment is entirely financed with long-term bonds with 9% interest rate. The company currently has no debt or preferred stock. Plan 2 means selling shares which will give the company net SEK 20 per share. The company has 1 million shares outstanding. Roberts AB has a tax rate of 40%.
a. Calculate the equilibrium point for the company's return for each of the two financing plans (the indifference level of EBIT).
b. Draw an EBIT-EPS chart in order to graphically show the difference in returns for the two different financing plans.
c. Which financing plan would cause the biggest change in EPS due to a change in EBIT? Why? d. If EBIT is expected to be SEK 3.1 million, which financing plan should the company choose?