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# Indifferent point of EBIT

(The following information relates to Questions 19 to 22)

Firm X with a 40% tax rate is comparing two financing plans. Plan A involves 2,000 shares of common stock and \$20,000 of debt. Plan B consists of 2,500 shares of common stock and \$10,000 of debt. The annual interest rate is 5%. Presently, this company is all-equity financed and has 3,000 shares outstanding.

19. What is the indifferent point of EBIT between these two plans?
A) \$8,000
B) \$7,000
C) \$6,000
D) \$5,000
E) \$4,000

20. At the indifference point of EBIT calculated in Question (19), what will be the corresponding earnings per share (EPS)?
A) \$0.6
B) \$0.8
C) \$1.0
D) \$1.2
E) \$1.4

21. What is the fixed financing cost (i.e. interest payment on debt) that the company has to face under Plan A?
A) \$500
B) \$750
C) \$1,000
D) \$1,250
E) Undetermined

22. If the future EBIT is estimated to be \$8,000, which plan will this company prefer?
A) Plan A because of its higher EPS
B) Plan B because of its higher EPS
C) Neither plan because of the high leverage
D) Both plans because of their equal EPS

#### Solution Summary

Solution contains calculations of Indifferent point of EBIT and EPS.

\$2.19