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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 (1,000,000 shares) 5,000,000
Retained earnings 500,000
TOTAL $9,000,000
The federal tax rate is 50 percent. Sunshine Candy Company, home-based in Orlando, wants to raise an additional $1,000,000 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 percent 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 $6,800,000. Find the indifference level of EBIT (with regard to earnings per share) between the suggested financing plans.
Answer
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