Crown Data(CD) Has a Current Capital Structure That Consists of $120

question 68

Multiple Choice

Crown Data(CD) has a current capital structure that consists of $120 million in common equity (15 million shares) and $80 million in long-term debt with an average interest rate of 11%. CD is considering an expansion project that will cost $22 million. The project will be financed either by issuing long-term debt at a cost of 12.5%, or the sale of new common stock at $35 per share. The firm's marginal tax rate is 40%. What is the EBIT indifference point between the two financing options?

• A) $71.5 million
• B) $77.2 million
• C) $68.3 million
• D) $1.0 million

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Definitions:

Preferred Method

A recommended or favored way of doing something, often based on its effectiveness or efficiency.

Cash Flows

The entire amount of currency transactions flowing into and out of a venture, essentially affecting its cash flow status.

Payback Calculation

A financial analysis method used to determine the time required to recoup the cost of an investment, based on the cash inflows from the investment.

Time Value

Time value refers to the concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.