Southland Corporation has a present capital structure consisting of common stock (10 million shares) and debt ($150 million, 8% coupon rate). The company needs to raise $60 million and is undecided between two financing plans. Plan A: Equity financing. Under this plan, an additional common stock will be sold at $15 per share. Plan B: Debt financing. Under this plan, the firm will issue 10% coupon bonds. At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 40% marginal tax rate.

The level of operating income (EBIT) where the firm will be indifferent between the two plans is $33 million.

Explanation:

Indifferent level of EBIT refers to the EBIT level where the he Earnings Per Share (EPS) two alternative financial plans are the same.

Indifferent level of EBIT can be calculated using the following formula:

[(EBIT - FB) * (1 - T)] / SA = [(EBIT - FB) * (1 - T)] / SB (1)

Where:

EBIT = Indifference level of EBIT

FA = Fixed interest costs under plan B = Interest on existing debt = $150 * 8% = $12 million

FB = Fixed interest costs under plan A = Interest on existing debt + Interest on new debt = ($150 * 8%) + ($60 * 10%) = $18 million

T = Tax rate = 40%, or 0.40

SA = Number of equity shares outstanding under Plan B = Existing number of shares + New number of shares = 10 million + ($60 million / $15) = 10 million + 4 million = 14 million

SB = Number of equity shares outstanding under Plan A = Existing number of shares = 10 million

Substiuting the values into equation (1) and solve for EBIT, we have:

[(EBIT - 12) * (1 - 0.40)] / 14 = [(EBIT - 18) * (1 - 0.40)] / 10

[(EBIT - 12) * 0.60] / 14 = [(EBIT - 18) * 0.60] / 10

[EBIT0.60 - 7.20] / 14 = [(EBIT0.06 - 10.80] / 10

[EBIT0.60 - 7.20] * 10 = [(EBIT0.06 - 10.80] * 14

EBIT6 - 72 = EBIT8.40 - 151.20

-72 + 151.20 = EBIT8.40 - EBIT6

EBIT2.40 = 79.20

EBIT = 79.20 / 2.40

EBIT = $33 million

Therefore, the level of operating income (EBIT) where the firm will be indifferent between the two plans is $33 million.

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pell grant

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merit-based scholarship

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anita wants to pursue a certificate program in sports nutrition. to pay for the course, she borrows money by filing the fafsa.

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nathan comes from a low-income household. he wants to pursue an undergraduate degree in marketing. he receives financial aid covering 50 percent of his college expenses. nathan does not have to pay back this amount.

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