Dippity Doodle Noodle Makers Has a Capital Structure That Consists

Multiple Choice

Dippity Doodle Noodle Makers has a capital structure that consists of 2.0 million shares outstanding and $2.0 million of debt at 8% interest. The company is planning a major plant expansion and must decide between the following two financing plans. Option 1 is to increase debt by $1.0 million at 9% interest and sell 10,000 new shares of stock at $50 per share. Option 2 is to sell 30,000 new shares of stock at $50 per share. What would be the indifference point and, considering that EBIT is expected to be $10,000,000, which option would be best?

A) Indifference of $10,750,000; use stock option.
B) Indifference of $1,600,000; use stock option.
C) Indifference of $16,270,000; use the debt option.
D) Indifference of $9,250,000; use the debt option.