High Sky Inc. a hot-air balloon manufacturing firm, currently has the following simplified balance sheet:
Assets Liabilities and Capital
Total assets $800,000 Bonds (9% interest) $500,000
Common stock at par ($4), 50,000 shares $200,000
outstanding Contributed capital in excess of par $50,000
Retained earnings $50,000
Total liabilities and capital $800,000
The company is planning an expansion that is expected to cost $1,750,000. The expansion can be financed with new equity (sold to net the company $11 per share) or with the sale of new bonds at an interest rate of 13 percent. (The firm’s marginal tax rate is 40%.) Use Table V to answer the questions.
Compute the indifference point between the two financing alternatives. Round your answer to the nearest dollar.
$
If the expected level of EBIT for the firm is $250,000 with a standard deviation of $60,000, what is the probability that the debt financing alternative will produce higher earnings than the equity alternative? (EBIT is normally distributed.) Round your answer to two decimal places. 10.123% would be entered as 10.12
%
If the debt alternative is chosen, what is the probability that the company will have negative earnings per share in any period? Round your answer to two decimal places.
%