Crown Data (CD) has a current capital structure that consists of$120 million in common equity (15 million shares) and $80 million in long-term debt with an average interest rate of 11 percent.CD is considering an expansion project that will cost $22 million.The project will be financed either by issuing long-term debt at a cost of 12.5 percent, or the sale of new common stock at $35 per share.The firm's marginal tax rate is 40%.What is the EBIT indifference point between the two financing options?
A)$71.5 million
B)$77.2 million
C)$68.3 million
D)$1.0 million

Question

Quizplus · Accepted Answer

Solution:
 $$\frac { ( \mathrm { EBIT } - 11.55 ) ( 1 - 0.4 ) } { 15 } - \frac { ( \mathrm { EBIT } - 8.8 ) ( 1 - 0.4 ) } { 15.62857143 }$$ 
EBIT* = $77.2 million

Crown Data (CD) Has a Current Capital Structure That Consists