Dippity Doodle Noodle Makers has a capital structure that consists of2.0 million shares outstanding and $2.0 million of debt at 8% interest.The company is planning a major plant expansion must decide between the following two financing plans.Option 1 is to increase debt by $1.0 million at 9% interest and sell 10,000 new shares of stock at $50 per share.Option 2 is to sell 30,000 new shares of stock at $50 per share.What would be the indifference point and considering that EBIT is expected to be $10,000,000 which option would be best
A)Indifference of $10,750,000.Use stock option.
B)Indifference of $1,600,000.Use stock option.
C)Indifference of $16,270,000.Use the debt option.
D)Indifference of $9,250,000.Use the debt option.

Question

Quizplus · Accepted Answer

Solution: $$\frac { E B I T - ( 160,000 + 90,000 ) } { 2,000,000 + 10,000 } = \frac { E B I T - 160,000 } { 2,000,000 + 30,000 }$$ 
1.01 EBIT - 252,500 = EBIT - 160,000
1.01 EBIT - 1EBIT = 252,500 - 160,000
.01 EBIT = 92,500
EBIT = 9,250,000 Indifference Point

Dippity Doodle Noodle Makers Has a Capital Structure That Consists