Knight Moves is considering two alternative financing plans. The firm is expected to operate at the $75 million EBIT level. Under Plan D (debt financing) EPS is expected to be $2.25, and under Plan E (equity financing) EPS is expected to be $1.82. If the market is expected to assign a P/E ratio of 12 to the debt plan and 15 to the equity plan, which plan should Knight pursue?
A) debt
B) equity
C) indifferent between the two alternatives
D) neither is satisfactory

Question

Quizplus · Accepted Answer

The Answer of Knight Moves is considering two alternative financing plans. The firm is expected to operate at the $75 million EBIT level. Under Plan D (debt financing) EPS is expected to be $2.25, and under Plan E (equity financing) EPS is expected to be $1.82. If the market is expected to assign a P/E ratio of 12 to the debt plan and 15 to the equity plan, which plan should Knight pursue?
A) debt
B) equity
C) indifferent between the two alternatives
D) neither is satisfactory

Knight Moves Is Considering Two Alternative Financing Plans