A company is attempting to select between two financing alternatives. Option 1 is to issue an...

A company is attempting to select between two financing alternatives. Option 1 is to issue an additional $1 million in debt at 8%. The second option is to issue $1 million o common shares at $25/share. The firm currently has $250,000 of 7% debt and 100,000 shares of common outstanding. Its tax rate is 40%.

a. What is the indifference point?

b. Which option would you choose if the EBIT is projected to be $100,000?

c. Which option would you choose if the EBIT is projected to be $350,000?

Expert Solution

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jeff jeffy answered 2 years ago

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