The Albany Corporation Has a Present Capital Structure Consisting of Common

question 76

Multiple Choice

The Albany Corporation has a present capital structure consisting of common stock ($200 million, 10 million shares) and debt ($150 million, 8%) . The company is planning a major expansion and is undecided between two financing plans.
Plan A: Equity financing. Under this plan, an additional 2.5 million shares of common stock will be sold at $15 each.

Plan B: Debt financing. Under this plan, $37.5 million of 10% long-term debt will be sold.
?
What is the EBIT-EPS indifference point? Assume a 40 percent marginal tax rate.

• A) $33.9 million
• B) $30.75 million
• C) $37.0 million
• D) $12.9 million

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Definitions:

Freud

Sigmund Freud, an Austrian neurologist and the founder of psychoanalysis, a method for treating psychopathology through dialogue between a patient and a psychoanalyst.

REM Sleep

Rapid Eye Movement sleep, a stage of sleep characterized by rapid movement of the eyes, low muscle tone, vivid dreams, and increased brain activity.

Narcolepsy

A sleep disorder marked by excessive daytime sleepiness, often accompanied by sudden muscle weakness or sleep attacks.

REM Rebound

The tendency for REM sleep to increase following REM sleep deprivation (created by repeated awakenings during REM sleep).