Midwest Can Company Is Considering Opening a New Plant in St.Louis

question 2

Multiple Choice

Midwest Can Company is considering opening a new plant in St.Louis that is expected to produce an average EBIT of $3 million per year.To finance this new plant, Midwest is considering two financing plans.The first plan is to sell 600,000 shares of common stock at $15 each.The second plan is to sell 200,000 shares of common stock at $15 each and $6 million of 13 percent long-term debt.If Midwest has a marginal tax rate of 40 percent, what is the EBIT-EPS indifference point for this plant?

• A)$702,000
• B)$234,000
• C)$2,234,000
• D)$1,170,000

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Definitions:

Deposits

Funds placed into an account at a financial institution for safekeeping and often to earn interest.

Federal Reserve

The central banking system of the United States, responsible for monetary policy, regulating banks, maintaining financial stability, and providing banking services to governmental institutions.

Board of Governors

The Federal Reserve System’s governing body.

Federal Open Market Committee

A branch of the Federal Reserve that oversees open market operations, including the buying and selling of government securities, to influence the money supply and interest rates.