Lulu's Lolly Company's capital structure for the past year of operation is shown below.
First mortgage bonds at 12% $2,000,000
Debentures at 15% 1,500,000
Ordinary shares (1 million shares)5,000,000
Retained earnings 500,000
Total $9,000,000
The federal tax rate is 50%.Lulu's Lollies,home-based in Newcastle wants to raise an additional $1 million to open new facilities in Perth and Rockhampton The firm can accomplish this via two alternatives: (1)it can sell a new issue of 20-year debentures with 16% interest;or (2)20,000 new shares of ordinary shares can be sold to the public to net the candy company $50 per share.A recent study,performed by an outside consulting organisation projected Lulu's Lollies long-term EBIT level at approximately $6.8 million.Find the indifference level of EBIT (with regard to EPS)between the suggested financing plans.

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The Answer of Lulu's Lolly Company's capital structure for the past year of operation is shown below.
First mortgage bonds at 12% $2,000,000
Debentures at 15% 1,500,000
Ordinary shares (1 million shares)5,000,000
Retained earnings 500,000
Total $9,000,000
The federal tax rate is 50%.Lulu's Lollies,home-based in Newcastle wants to raise an additional $1 million to open new facilities in Perth and Rockhampton The firm can accomplish this via two alternatives: (1)it can sell a new issue of 20-year debentures with 16% interest;or (2)20,000 new shares of ordinary shares can be sold to the public to net the candy company $50 per share.A recent study,performed by an outside consulting organisation projected Lulu's Lollies long-term EBIT level at approximately $6.8 million.Find the indifference level of EBIT (with regard to EPS)between the suggested financing plans.

Lulu's Lolly Company's Capital Structure for the Past Year of Operation