Charming Miracle Co. is trying to decide how best to finance a proposed P10,000,000 capital investment. Under Plan I, the project will be financed entirely with long-term 9% bonds. The firm currently has no debt or preferred stock. Under Plan II, common stock will be sold at P20 a share; presently, 1,000,000 shares are outstanding. The corporate tax rate is 40%. REQUIRED: Calculate the indifference level of EBIT associated with the two financing plans. Which financing plan would you expect to cause the greatest changes in EPS relative to a change in EBIT? Why? If EBIT is expected to be P3,100,000, which plan will result in a higher EPS?

Charming Miracle Co. is trying to decide how best to finance a proposed P10,000,000 capital investment. Under Plan I, the project will be financed entirely with long-term 9% bonds. The firm currently has no debt or preferred stock. Under Plan II, common stock will be sold at P20 a share; presently, 1,000,000 shares are outstanding. The corporate tax rate is 40%. REQUIRED: Calculate the indifference level of EBIT associated with the two financing plans. Which financing plan would you expect to cause the greatest changes in EPS relative to a change in EBIT? Why? If EBIT is expected to be P3,100,000, which plan will result in a higher EPS?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 21P

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