1) Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity. The firm has 500,000 shares of common stock outstanding. Sand Key is planning a major expansion and will need to raise $15 million. The firm must decide whether to finance the expansion with debt or equity. If equity financing is selected, common stock will be sold at $75 per share. If debt financing is chosen, 6% coupon bonds will be sold. The firm's marginal tax rate is 34%. Determine the level of operating income at which Sand Key would be indifferent between debt financing and equity financing.
$6,200,000
$4,625,000
$5,150,000
$6,725,000
$5,675,000
2) Sand Key Development Company estimates that it will generate an operating income of $7.25 million. Which financing option should Sand Key use?
The equity financing option.
The debt financing option.
The firm should abandon plans for expansion.
Sand Key is indifferent between the two options.
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