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% 10-year bonds. Young's tax rate is 40%.
a. Calculate the financing plan's EBIT indifference point.
b. 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.