Mr. Brew Cafeteria has computed the indifference point betweendebt and common equity financing options to...

Mr. Brew Cafeteria has computed the indifference point between debt and common equity financing options to be $4 millions of EBIT. EBIT is approximately normally distributed with an expected value of $4.5 million and a standard deviation of $600,000. What is the probability that the equity financing option will be superior to the debt option?

Hint: remember that equity financing is preferred when EBIT is below the indifference point.

Expert Solution

jeff jeffy answered 2 years ago

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