The MAX Corporation is planning a $4 million expansion this year.The expansion can be financed by issuing either ordinary shares or bonds.The new ordinary shares can be sold for $60 per share.The bonds can be issued with a 12% coupon rate.The firm's existing shares of preference shares pay dividends of $2.00 per share.The company's combined state and federal corporate income tax rate is 46%.The company's balance sheet prior to expansion is as follows:
MAX Corporation
Current assets $ 2,000,000
Fixed assets 8,000,000
Total assets $10,000,000
Current liabilities $ 1,500,000
Bonds:
(8%,$1,000 par value)1,000,000
(10%,$1,000 par value)4,000,000
Preference shares:
($100 par value)500,000
Ordinary shares:
($2 par value)700,000
Retained earnings 2,300,000
Total liabilities and equity $10,000,000
a.Calculate the indifference level of EBIT between the two plans.
b.If EBIT is expected to be $3 million,which plan will result in higher EPS?

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The Answer of The MAX Corporation is planning a $4 million expansion this year.The expansion can be financed by issuing either ordinary shares or bonds.The new ordinary shares can be sold for $60 per share.The bonds can be issued with a 12% coupon rate.The firm's existing shares of preference shares pay dividends of $2.00 per share.The company's combined state and federal corporate income tax rate is 46%.The company's balance sheet prior to expansion is as follows:
MAX Corporation
Current assets $ 2,000,000
Fixed assets 8,000,000
Total assets $10,000,000
Current liabilities $ 1,500,000
Bonds:
(8%,$1,000 par value)1,000,000
(10%,$1,000 par value)4,000,000
Preference shares:
($100 par value)500,000
Ordinary shares:
($2 par value)700,000
Retained earnings 2,300,000
Total liabilities and equity $10,000,000
a.Calculate the indifference level of EBIT between the two plans.
b.If EBIT is expected to be $3 million,which plan will result in higher EPS?

The MAX Corporation Is Planning a $4 Million Expansion This