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Greystone Corporation has a present capital structure consisting of common stock (10 million shares) and debt ($150 million, 8% coupon rate)
Greystone Corporation has a present capital structure consisting of common stock (10 million shares) and debt ($150 million, 8% coupon rate). The company needs to raise $36 million and is undecided between two financing plans. Plan A: Equity financing. Under this plan, on additional common stock will be sold at $15 per share. Plan B Debt financing. Under this place, the firm will issue 10%. coupon bonds At what level of operating income (EBIT) Will the time indifferent between the two plans? Assure 3 40% marginal tax rate. $300 millon 5318 min $32.4 millon 0.533 in 0 5312 million
Expert Solution
1. # of Equity Share After Issue = Current Shares O/s + New Capital / Issue Price = 10000000 + (36000000/15) =12400000 Shares
EPS under equity Plan = EPS under Debt Plan
(EBIT - Interest) / # of Shares = (EBIT - Interest @ 8% - Interest @ 10%) / # of Shares
(EBIT - 12000000) / 12400000 = (EBIT - 12000000 - 3600000) / 10000000
(EBIT - 12000000) / 124 = (EBIT - 15600000) / 100
100 * EBIT - 12000000 * 100 = 124 * EBIT - 15600000 * 124
24 * EBIT = 734400000
EBIT = 30.60 Million Option A
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