Ipsy Dipsy Preschools, Inc

Multiple Choice

Ipsy Dipsy Preschools, Inc.has a capital structure that consists of 60% common equity (2.0 million shares) , 30% long-term debt ($10 million with 12% coupon) , and 10% preferred stock ($50 par value with $4.75 dividend) .The company is planning a major plant expansion and is undecided between the following two financing plans:
1) Equity financing: Sale of 400,000 shares of common at $10 each.
2) Debt financing: Sale of$4 million of 12.5 percent long-term bonds.
Calculate the EBIT-EPS indifference point.Assume the marginal tax rate is 40%.

A) $4.253 million
B) $3.051 million
C) $3.654 million
D) $4.728 million