Alace is an all equity firm with 10 million shares outstanding that is evaluating two alternative financing plans. With the first plan, Alace will sell 1 million shares of common stock at $15 each. Under the second plan, the firm would sell $15 million of 12 percent long-term debt. If Alace has a marginal tax rate of 35 percent, what is the EBIT-EPS indifference point?
A) $12.9 million
B) $19.8 million
C) $11.7 million
D) $18.0 million

Question

Quizplus · Accepted Answer

Solution:
(EBIT - $1.8)(1 - 0.35)/10 = (EBIT - 0)(1 - 0.35)/(10 + 1)
EBIT = $19.8 million

Alace Is an All Equity Firm with 10 Million Shares