A Firm's Capital Structure Is Made Up of 200,000 Common

Essay

A firm's capital structure is made up of 200,000 common shares and $1,000,000 debt at 12% interest.The company's tax rate is 50%.An additional $500,000 has to be raised, and the following financing alternatives are available:
Option 1: Common shares: The company can sell additional shares at $10 a share.Hence, 50,000 new shares would have to be issued.
Option 2: Debt: Debt can be issued at 12%, requiring interest payments of $60,000.
Compute EPS as a function of EBIT for both alternatives and derive the break-even point.