Senex Energy Limited is trying to decide how best to finance a proposed $10 million capital investment.Under Plan I,the project will be financed entirely with long-term 9% bonds.The firm currently has no debt or preference shares.Under Plan II,ordinary shares will be sold to net the firm $20 a share;presently,1 million shares are outstanding.The corporate tax rate for Roberts is 40%.
a.Calculate the indifference level of EBIT associated with the two financing plans.
b.Which financing plan would you expect to cause the greatest change in EPS relative to a change in EBIT? Why?
c.If EBIT is expected to be $3.1 million,which plan will result in a higher EPS?

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The Answer of Senex Energy Limited is trying to decide how best to finance a proposed $10 million capital investment.Under Plan I,the project will be financed entirely with long-term 9% bonds.The firm currently has no debt or preference shares.Under Plan II,ordinary shares will be sold to net the firm $20 a share;presently,1 million shares are outstanding.The corporate tax rate for Roberts is 40%.
a.Calculate the indifference level of EBIT associated with the two financing plans.
b.Which financing plan would you expect to cause the greatest change in EPS relative to a change in EBIT? Why?
c.If EBIT is expected to be $3.1 million,which plan will result in a higher EPS?

Senex Energy Limited Is Trying to Decide How Best to Finance