Sulzar's Capital Structure Consists Only of Common Stock (20 Million

question 40

Multiple Choice

Sulzar's capital structure consists only of common stock (20 million shares) , but the firm is planning a major expansion which will require $100 million of new capital.Sulzar has a choice of obtaining the needed capital through the sale of 5 million shares of common stock at $20 per share or the sale of $100 million of first mortgage bonds that would have a coupon rate of 9%.If Sulzar has a marginal tax rate of 40%, calculate the EBIT-EPS indifference point.

• A)$45 million
• B)$36 million
• C)$5 million
• D)$9 million

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Definitions:

Financing Activities

Transactions that result in changes to the size and composition of the equity capital or borrowings of the entity, detailed in the cash flow statement.

Current Assets

Assets that are expected to be converted into cash, sold, or consumed within one year or within the business's operating cycle, whichever is longer.

Financing Cash Flow

Cash flow that is related to the financing of a company's operations, including debt, equity, and dividends.

Common Stock

A form of financial security that denotes part ownership in a company and entails a stake in the company's earnings or deficits.