Higgins Currently Has 2 Million Shares of Common Stock Outstanding

question 83

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 percent 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 percent 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 percent coupon.What is the EBIT indifference level between these two alternatives? Assume the marginal tax rate is 40 percent.

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

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Definitions:

Current Path

The path or route that electric current follows as it flows through a circuit.

One Path

A circuit configuration where all components are arranged so that there is only a single pathway for current flow.

Applied Voltage

The voltage that is externally applied to a circuit or component to drive its operation.

Fuse

A safety device consisting of a strip of wire that melts and breaks an electric circuit if the current exceeds a safe level.