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:

Correlation Coefficient

An index that quantifies the magnitude and direction of a straight-line association between a pair of variables.

Estimate Reliability

A measure or assessment of the stability or consistency of an estimate from one context or test administration to another.

Interest Rate

The financial charge on a borrower by a lender for asset usage, presented as a percentage of the principal figure.

Present Value

The value in today's currency of a future sum of money or series of cash flows, discounted using a known rate of return.