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Question
Sunshine Candy Company's capital structure for the past year of operation is shown below.| First mortgage bonds at 12% | $2,000,000 |
| Debentures at 15% | 1,500,000 |
| Common stock (1 million shares) | 5,000,000 |
| Retained earnings | 500,000 |
| Total | $9,000,000 |
The federal tax rate is 50%. Sunshine Candy Company, home-based in Orlando, wants to raise an additional $1 million to open new facilities in Tampa and Miami. The firm can accomplish this via two alternatives: (1) it can sell a new issue of 20-year debentures with 16% interest; or (2) 20,000 new shares of common stock can be sold to the public to net the candy company $50 per share. A recent study, performed by an outside consulting organization, projected Sunshine Candy Company's long-term EBIT level at approximately $6.8 million. Find the indifference level of EBIT (with regard to EPS) between the suggested financing plans.
Answer
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