A firm has a projected EBIT of $20,000 for a new project.The funds needed for the project are $40,000.The firm can finance the project completely with debt at a pre-tax interest cost of 10%.Alternatively,the firm could finance the project with equity by selling stock at $5 per share.If there are 500,000 shares outstanding and the firm's tax rate is 40%,what is the EBIT-EPS indifference point?
A) $254,000
B) $504,000
C) $40,000
D) $20,000
E) $500,000

Question

Quizplus · Accepted Answer

11ea7fdb_fc5c_63b8_a768_1be8f3d4d6dd_TB2902_11 = 11ea7fdb_fc5c_63b9_a768_1775f1297fc5_TB2902_11 11ea7fdb_fc5c_63ba_a768_1b6545d8b7f6_TB2902_11 = $40,000 × 0.10 = $4,000
Additional shares = 11ea7fdb_fc5c_8acb_a768_35e4cbc59f95_TB2902_11 = 8,000 11ea7fdb_fc5c_8acc_a768_37d26691b39d_TB2902_11 = 11ea7fdb_fc5c_8acd_a768_570f71245c62_TB2902_11 EBIT = 11ea7fdb_fc5c_8ace_a768_651be01f029f_TB2902_11 × 11ea7fdb_fc5c_8acf_a768_c9d9319886c3_TB2902_11 EBIT = $4,000 × 11ea7fdb_fc5c_8ad0_a768_3fb3a5711ee6_TB2902_11 EBIT = $4,000 × 63.5 = $254,000

A Firm Has a Projected EBIT of $20,000 for a New