Premium Lodging,Inc.,is financed entirely with 3 million shares of common stock selling for $50 a share.Capital of $10 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 11 percent 12-year bonds.Premium Lodging's tax rate is 35 percent. a.Calculate the financing plan's EBIT indifference point.
b. The expected level of EBIT is $10,320,000 with a standard deviation of $2,000,000. What is the probability that EBIT will be above the indifference point?
c. Does the "indifference point" calculated in question (a) above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.

Question

Premium Lodging,Inc.,is financed entirely with 3 million shares of common stock selling for $50 a share.Capital of $10 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 11 percent 12-year bonds.Premium Lodging's tax rate is 35 percent. a.Calculate the financing plan's EBIT indifference point.
b.	The expected level of EBIT is $10,320,000 with a standard deviation of $2,000,000. What is the probability that EBIT will be above the indifference point?
c.	Does the "indifference point" calculated in question (a) above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.

Quizplus · Accepted Answer

The Answer of Premium Lodging,Inc.,is financed entirely with 3 million shares of common stock selling for $50 a share.Capital of $10 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 11 percent 12-year bonds.Premium Lodging's tax rate is 35 percent. a.Calculate the financing plan's EBIT indifference point.
b.	The expected level of EBIT is $10,320,000 with a standard deviation of $2,000,000. What is the probability that EBIT will be above the indifference point?
c.	Does the "indifference point" calculated in question (a) above truly represent a point where stockholders are indifferent between stock and debt financing? Explain your answer.