Plan A is an all common equity structure in which 2.2 million dollars would be r
ID: 2344265 • Letter: P
Question
Plan A is an all common equity structure in which 2.2 million dollars would be raised by selling 88,000 shares of common stock.Plan B would involve issuing $1.1 millon dollarsin long term bonds with an effective interest rate of 12.5% plus 1.1 million would be raised by selling $44,000 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 34% tax rate in their analysis. The EBIT indifference level associated with the two financing plans is $___________(Round to the nearest $)
Explanation / Answer
(EBIT* - I1) (1 – t)/n1 = (EBIT* - I2) (1- t)/n2 ( EBIT* -0)*(1-34%)/88,000 = (EBIT*- 12.5%*1.1)*(1-34%)/$44,000 EBIT*/2 =EBIT*- 0.1375 EBIT*=$0.275 million The EBIT indifference level associated with the two financing plans is $0.275 million (Round to the nearest $)