A company with EBIT of $5,000,000 is considering two financing alternatives. The first alternative would have $23 million of bonds at 7% interest and 900,000 common shares outstanding, whereas the second would have $45 million of bonds at 7% interest and only 700,000 shares outstanding. The company is in the 35% tax bracket.
Required: A. Construct the bottom half of the income statement (including EPS) for each financing alternative when EBIT is at $5,000,000.
B. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT increases by 25%.
C. Construct the bottom half of the income statement (including EPS) for each alternative if EBIT decreases by 25%.
D. What is the EBIT/EPS indifference point for this firm?