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Author Question: The MAX Corporation is planning a $4,000,000 expansion this year. The expansion can be financed by ... (Read 270 times)

LCritchfi

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on: May 1, 2019
The MAX Corporation is planning a $4,000,000 expansion this year. The expansion can be financed by issuing either common stock or bonds. The new common stock can be sold for $60 per share. The bonds can be issued with a 12 percent coupon rate. The firm's existing shares of preferred stock pay dividends of $2.00 per share. The company's corporate income tax rate is 46 percent. The company's balance sheet prior to expansion is as follows:

MAX Corporation
Current Assets$2,000,000
Fixed Assets8,000,000
Total Assets$10,000,000
Current Liabilities$1,500,000
Bonds:​
(8%, $1,000 par value)1,000,000
(10%, $1,000 par value)4,000,000
Preferred Stock:​
($100 par value)$500,000
Common Stock:​
($2 par value)700,000
Retained Earnings2,300,000
Total Liabilities and Equity$10,000,000

a.Calculate the indifference level of EBIT between the two plans.
b.If EBIT is expected to be $3 million, which plan will result in higher EPS?
Foundations of Finance ¦ Keown, Petty, Martin ¦ 9th Edition
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Marked as best answer by LCritchfi on May 1, 2019

ms_sulzle

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Reply #1 on: May 1, 2019
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LCritchfi

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Reply 2 on: May 1, 2019
Excellent

mjenn52

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Reply 3 on: Yesterday
Gracias!

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