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Question
Jocko Inc. has a capital structure that consists of 60% common equity (2.0 million shares), 30% long-term debt ($10 million with 12% coupon), and 10% preferred stock ($50 par value with $4.75 dividend). The company is planning a major plant expansion and is undecided between the following two financing plans:1. Equity financing: Sale of 400,000 shares of common at $10 each.
2. Debt financing: Sale of $4 million of 12.5 percent long-term bonds.
Calculate the EBIT-EPS indifference point. Assume the marginal tax rate is 40%.
| a. | $4.253 million |
| b. | $3.051 million |
| c. | $3.654 million |
| d. | $4.728 million |
Answer
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