Plan A is an all common equity structure in which 2.4 million dollars would be r
ID: 2344233 • Letter: P
Question
Plan A is an all common equity structure in which 2.4 million dollars would be raised by selling 90,000 shares of common stock.Plan B would involve issuing $1.1 millon dollarsin long term bonds with an effective interest rate of 11.8% plus 1.3 million would be raised by selling $45,000 shares of common stock. The debt funds raised Under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firms capital structure.
Abe and his partners plan to use a 38% tax rate in their analysis. The EBIT indifference level associated with the two financing plans is $___________
Explanation / Answer
EBIT= Revenue - Expenses = [2.4+1.3] -[ (1.1*.118)+.045] = 3.7-.1748 =3.525 - 38% tax =3.525- (.38*3.525) =1.3395 million dollars ans