Compute the indifference level of EBIT.
Moon and Chittenden are considering a new Internet venture to sell used textbooks. The project requires $300,000 in Financing. Two alternatives have been proposed:
Plan 1 (Common equity financing). Sell 30,000 shares of stock at a net price of $10 per share.
Plan 2 (Debt equity financing). Sell a combination of 15,000 shares of stock at a net price of $10 per share and $150,000 of long-term debt at a pretax interest rate of 12%.
Assume the corporate tax rate is 40%.
Compute the indifference level of EBIT between these two alternatives.