Dippity Doodle Noodle Makers Has a Capital Structure That Consists

question 64

Multiple Choice

Dippity Doodle Noodle Makers has a capital structure that consists of2.0 million shares outstanding and $2.0 million of debt at 8% interest.The company is planning a major plant expansion must decide between the following two financing plans.Option 1 is to increase debt by $1.0 million at 9% interest and sell 10,000 new shares of stock at $50 per share.Option 2 is to sell 30,000 new shares of stock at $50 per share.What would be the indifference point and considering that EBIT is expected to be $10,000,000 which option would be best

• A)Indifference of $10,750,000.Use stock option.
• B)Indifference of $1,600,000.Use stock option.
• C)Indifference of $16,270,000.Use the debt option.
• D)Indifference of $9,250,000.Use the debt option.

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Definitions:

Profitable Output

The level of production at which a business or entity maximizes its profit, considering its cost structure and market demand.

Firm

A business organization, such as a corporation, partnership, or sole proprietorship, that sells goods or services to make a profit.

Economic Profits

The difference between total revenue and total costs, including both explicit and implicit costs, representing the additional gain beyond the normal profit level.

Implicit Costs

The opportunity costs of using resources owned by the firm for its own production rather than earning income elsewhere.