Question

2. Robert Financing has two competing financing alternatives The Company Corp. A. Issue $ 5 million...

2. Robert Financing has two competing financing alternatives The Company Corp.
A. Issue $ 5 million in common stock at $ 50 per share
B. Issuing a straight bond at par value for the same amount as in B with a coupon rate of 10%
C. The Company’s marginal tax rate is 30%
D. The Company currently has 10 million shares of common stock outstanding

Required:
a. Which of the two financing options is better? Support your recommendation with numbers
b. At what EBIT* level Robert should be indifferent between the two alternatives?
(Hint: level of EBIT* is equal of level of equilibrium of the two alternatives)

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