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A group of graduate students has decided to form a small Internet Service Company in Brevard...

A group of graduate students has decided to form a small Internet Service Company in Brevard County. The company will service Brevard County Florida home users and need $400 million to start the company. Two financing plans have been proposed by the investment banking firms. Plan A is an all common- equity alternative. Under this agreement, 4 million common shares will be sold to net the firm $100 per share. Plan B involves the use of financial leverage (debt and equity). A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 10 percent, and the principal borrowed will amount to

$200 million. The corporate tax rate is 40 percent. If the detailed financial analysis

projects that there is a 30% chance that EBIT will be $15.0 million, 40% chance that it will be $18.0 million, and 30% chance that it will be $20 million annually, which plan will maximize the wealth of the stockholders? (note: the problem is based on the understanding of financial statement and financial leverage)

Plan ?

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jeff jeffy answered 1 month ago
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