Robee, Inc. Is trying to decide how best to finance a proposed P10 million capital investment. Under plan A , the project will be financed by entirely with long term 9% bonds. The firm currently has no debt or preferred stock. Under plan B, Common stock will be sold to net the firm P20 per share; presently one million shares are outstanding. The corporate tax is 40%. a) Calculate the indifference level of EBIT associated with the two financing plans (an EBIT that both financing plans have the same EPS) b) If EBIT expected to be P3.10 million, which plan will result in higher EPS?

Robee, Inc. Is trying to decide how best to finance a proposed P10 million capital investment. Under plan A , the project will be financed by entirely with long term 9% bonds. The firm currently has no debt or preferred stock. Under plan B, Common stock will be sold to net the firm P20 per share; presently one million shares are outstanding. The corporate tax is 40%. a) Calculate the indifference level of EBIT associated with the two financing plans (an EBIT that both financing plans have the same EPS) b) If EBIT expected to be P3.10 million, which plan will result in 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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