Higgins currently has 2 million shares of common stock outstanding that are selling for $32 per share. Higgins also has a $20 million mortgage bond outstanding that has an 11 percent coupon rate. Higgins is considering two alternatives to financing a major expansion. Plan A is to sell $10 million of additional long-term debt with a 12.5 percent coupon. Plan B is to sell 200,000 shares of common stock at $30 per share and $4 million in long-term debt with a 11.25 percent coupon. What is the EBIT indifference level between these two alternatives? Assume the marginal tax rate is 40 percent.
A) $1,374,000
B) $11,450,000
C) $4,554,000
D) $2,650,000

Question

Quizplus · Accepted Answer

Solution:
(EBIT - $3.45)(0.6)/2 = (EBIT - $2.65)(0.6)/2.2
EBIT* = $11.45 million

Higgins Currently Has 2 Million Shares of Common Stock Outstanding