Selection of optimal source of finance and calculating times interest earned ratio
Morton Industries is considering opening a new subsidiary in Boston, to b operated as a separate company. The
company's financial analysts expect the company is considering the following two financing plans (use a 40% marginal tax rate in your analysis):
Plan 1 (Equity financing). Under this plan, 2 million common shares will be sold at $10 each.
Plan 2 (Debt equity financing). Under this plan, $10 million of 12% long-term debt and 1 million common shares at $10 each will be sold.
Suppose Morton adopts Plan 2, and the Boston facility initially operates at an annual EBIT level of $6 million. What is the time interest earned ratio?