Question

Alafaya has a present capital structure consisting of common stock (10 million shares) and debt ($...

Alafaya has a present capital structure consisting of common stock (10 million shares) and debt ($ 150 million, 8% Coupon rate). The company needs to raise $ 54 million and is undecided between two financing plans,

Plan A: Equity financing,
Under this plan, additional common stock will be sold at $ 15 per share

Plan B: Debt financing,
Under this plan, the firm will issue 10% coupon bonds.

At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume 40% marginal tax rate

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