Florence Flooring Limited is considering two different financing plans

Finance Nov 03, 2020

Florence Flooring Limited is considering two different financing plans. 1. Under plan I the interest would be 8% on $100,000 face value bonds. 2. Under plan II the interest would be $10,125 with 1,400 shares of common stock outstanding. If the indifference point is $25,000 and the tax rate is 30%, how many shares of common stock are outstanding for plan 1?

Expert Solution

1]	Indifference point is that level of EBIT for which, the EPS
	is the same under two financing options. Hence, when
	is $25,000, the EPS is the same under the two financing
	plans.
2]	The Common EPS can be found from details given for
	Plan 2.
	EPS = Net income/Number of shares = (25000-10125)*(1-30%)/1400 =	$ 7.4375
3]	The NI under Plan 1 = (25000-1000008%)(1-30%) =	$ 11,900
	Common stock shares outstanding for Plan 1 = NI/EPS = 11900/7.4375 =	1600	shares

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