Expo Inc. is planning a major expansion program requiring $5,000,000 in financing.Expo may sell bonds with an 8% coupon rate or sell 200,000 shares of common stock to get the needed funds. After the expansion there is a 30% probability of EBIT (Earnings Before Interest and Taxes) being $2 million, a 50% probability of it being $3 million and a 20% probability of it being $4 million. The following data was taken from the firm’s pre-expansion income statement:
Interest expense $100,000
Tax Rate 40%
Common shares outstanding 300,000
1. What level of EBIT would yield the same EPS for the stock and debt alternatives?
2. What EPS corresponds to this level of EBIT?