Sunshine Candy Company's capital structure for the past year of operation is shown below.
The federal tax rate is 50%.Sunshine Candy Company,home-based in Orlando,wants to raise an additional $1 million to open new facilities in Tampa and Miami.The firm can accomplish this via two alternatives: (1)it can sell a new issue of 20-year debentures with 16% interest;or (2)20,000 new shares of common stock can be sold to the public to net the candy company $50 per share.A recent study,performed by an outside consulting organization,projected Sunshine Candy Company's long-term EBIT level at approximately $6.8 million.Find the indifference level of EBIT (with regard to EPS)between the suggested financing plans.

Question

Sunshine Candy Company's capital structure for the past year of operation is shown below.  
The federal tax rate is 50%.Sunshine Candy Company,home-based in Orlando,wants to raise an additional $1 million to open new facilities in Tampa and Miami.The firm can accomplish this via two alternatives: (1)it can sell a new issue of 20-year debentures with 16% interest;or (2)20,000 new shares of common stock can be sold to the public to net the candy company $50 per share.A recent study,performed by an outside consulting organization,projected Sunshine Candy Company's long-term EBIT level at approximately $6.8 million.Find the indifference level of EBIT (with regard to EPS)between the suggested financing plans.

Quizplus · Accepted Answer

The Answer of Sunshine Candy Company's capital structure for the past year of operation is shown below.  
The federal tax rate is 50%.Sunshine Candy Company,home-based in Orlando,wants to raise an additional $1 million to open new facilities in Tampa and Miami.The firm can accomplish this via two alternatives: (1)it can sell a new issue of 20-year debentures with 16% interest;or (2)20,000 new shares of common stock can be sold to the public to net the candy company $50 per share.A recent study,performed by an outside consulting organization,projected Sunshine Candy Company's long-term EBIT level at approximately $6.8 million.Find the indifference level of EBIT (with regard to EPS)between the suggested financing plans.

Sunshine Candy Company's Capital Structure for the Past Year of Operation