Young Enterprises Is Financed Entirely with 3 Million Shares of Common

Essay

Young Enterprises is financed entirely with 3 million shares of common stock selling for $20 a share.Capital of $4 million is needed for this year's capital budget.Additional funds can be raised with new stock (ignore dilution)or with 13 percent 10-year bonds.Young's tax rate is 40 percent.
a.Calculate the financing plan's EBIT indifference point.
b.The expected level of EBIT is $10,320,000 with a standard deviation of $2,000,000.What is the probability that EBIT will be above the indifference point?
c.Does the "indifference point" calculated in question (a)above truly represent a point where stockholders are indifferent between stock and debt financing?
Explain your answer.