Higgins Currently Has 2 Million Shares of Common Stock Outstanding

question 63

Multiple Choice

Higgins currently has 2 million shares of common stock outstanding that are selling for $32 per share. Higgins also has a $20 million mortgage bond outstanding that has an 11% coupon rate. Higgins is considering two alternatives to financing a major expansion. Plan A is to sell $10 million of additional long-term debt with a 12.5% coupon. Plan B is to sell 200,000 shares of common stock at $30 per share and $4 million in long-term debt with an 11.25% coupon. What is the EBIT indifference level between these two alternatives? Assume the marginal tax rate is 40%.

• A) $1,374,000
• B) $11,450,000
• C) $4,554,000
• D) $2,650,000

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Definitions:

Skills

Refers to the learned abilities or expertise that an individual possesses, which enable them to perform tasks or jobs effectively.

Labour Market

The supply and demand for labor, where employers seek to hire workers and individuals seek employment.

HR Forecasting Process

The method used by human resources to estimate the future demand for and supply of employees needed to ensure the company's operations run smoothly.

Source of Human Capital

Origin from which an organization acquires its employees' knowledge, skills, and abilities, contributing to its competitiveness and success.