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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