The Bullock Cafeteria Corporation has computed the indifference point between a debt and common equity financing option to be $4 million of EBIT. EBIT is approximately normally distributed with an expected value of $4.5 million and a standard deviation of $600,000. The coefficient of variation is equal to 0.13.
a. What is the probability that the equity financing option will be superior to the debt option?
b. Under the debt option, Bullock will incur $3 million in interest expenses. What is the chance of Bullock losing money under the debt option?