Balon Plastics,Inc

Essay

Balon Plastics,Inc.is trying to decide how best to finance a proposed $10,000,000 capital investment.Under Plan I,the project will be financed entirely with long-term 9 percent bonds.The firm currently has no debt or preferred stock.Under Plan II,common stock will be sold to net the firm $20 a share; presently,1,000,000 shares are outstanding.The corporate tax rate for Balon is 40 percent.
a.Calculate the indifference level of EBIT associated with the two financing plans.
b.Prepare an EBIT-EPS analysis chart,showing the intersection of the two financing plan lines.
c.Which financing plan would you expect to cause the greatest change in EPS relative to a change in EBIT? Why?
d.If EBIT is expected to be $3.1 million,which plan will result in a higher EPS?