Ipsy Dipsy Preschools Inc. has a capital structure that consists of 60% common equity (2.0 million shares), 30% long-term debt ($10 million with 12% coupon), and 10% preferred stock ($50 par value with $4.75 dividend). The company is planning a major plant expansion and is undecided between the following two financing plans:
1) Equity financing: Sale of 400,000 shares of common at $10 each
2) Debt financing: Sale of $4 million of 12.5 percent long-term bonds

Calculate the EBIT-EPS indifference point, assuming the marginal tax rate is 40%.
A) $4.253 million
B) $3.051 million
C) $3.654 million
D) $4.728 million

Question

Ipsy Dipsy Preschools Inc. has a capital structure that consists of 60% common equity (2.0 million shares), 30% long-term debt ($10 million with 12% coupon), and 10% preferred stock ($50 par value with $4.75 dividend). The company is planning a major plant expansion and is undecided between the following two financing plans: ​
1) Equity financing: Sale of 400,000 shares of common at $10 each
2) Debt financing: Sale of $4 million of 12.5 percent long-term bonds
​
Calculate the EBIT-EPS indifference point, assuming the marginal tax rate is 40%.
A) $4.253 million
B) $3.051 million
C) $3.654 million
D) $4.728 million

Quizplus · Accepted Answer

The Answer of Ipsy Dipsy Preschools Inc. has a capital structure that consists of 60% common equity (2.0 million shares), 30% long-term debt ($10 million with 12% coupon), and 10% preferred stock ($50 par value with $4.75 dividend). The company is planning a major plant expansion and is undecided between the following two financing plans: ​
1) Equity financing: Sale of 400,000 shares of common at $10 each
2) Debt financing: Sale of $4 million of 12.5 percent long-term bonds
​
Calculate the EBIT-EPS indifference point, assuming the marginal tax rate is 40%.
A) $4.253 million
B) $3.051 million
C) $3.654 million
D) $4.728 million