Author Question: The MAX Corporation is planning a $4,000,000 expansion this year. The expansion can be financed by ... (Read 261 times)

LCritchfi · **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 Assets	8,000,000
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 Earnings	2,300,000
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?

ms_sulzle · **Reply #1 on:** May 1, 2019

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