Calculation of EBIT-EPS Indifference point.
Emco Products has a present capital structure consisting only of common stock (10 million shares). The company is Planning a major expansion. At this time, the company is undecided between the following two financing plans
(Assume a 40 % marginal tax rate):
Plan 1 (Equity financing). Under this plan, an additional 5 million shares of common stock will be sold at $10 each
Plan 2 (Debt financing). Under this plan, $50 million of 10 percent long-term debt will be sold.
One piece of information the company desires for its decision analysis is an EBIT-EPS indifference point.
What happens to the indifference point if the interest rate on debt increases and the common stock sales price remains constant?