Question: Emco Products has a present capital structure consisting only of common stock of 10 million shares. The firm is planning a major expansion. At this time, the firm is undecided between the following two (2) financing plans. Suppose marginal tax rate is 40%:
Plan 1st [Equity financing]; Under this plan, an additional 5 million shares of common stock will be sold at $10 each
Plan 2nd [Debt financing]; Under this plan, $50 million of 10% long-term debt will be sold.
One piece of information the firm desires for its decision analysis is an EBIT-EPS indifference point. Determine what happens to the indifference point if the interest value on debt rise and the common stock sales price remains constant?