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Date Posted: 16:21:34 02/22/04 Sun
Author: Sandra Smith
Subject: Finance

Newlin Electronics is considering additional financing of $10,000. It currently has $50,000 of 12 percent (annual interest) bonds and 10,000 shares of common stock outstanding. The firm can obtain the financing through a 12 percent (annual interest) bond issue or the sale of l,000 shares of common stock. The firm has a 40 percent tax rate.

(a) Calculate two EBIT-EPS coordinates for each plan by selecting any two EBIT values and funding their associated EPS.

(b) Plot the two finding plans on a set of EBIT-EPS axes.

(c) On the basis of your graph in (b), at what level of EBIT does the bond plan becomes superior to the stock plan?

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