Magnetic Attractions Inc a web-based dating company, needs to raise capital to finance an expansion in their business. The company is trying to decide between borrowing or issuing more equity
Selected financial information is provided in the table below. The current capital structure is shown in the column labeled "Current." Under Option E, they will sell 200 new shares at the current price. Under Option D, they will borrow $160 at 6.25% and no new equity will be issued. There are currently 400 shares outstanding, and the firm is debt-free. The tax rate is 40%. To help Magnetic Attractions with its decision, what is the EBIT-EPS indifference point?
Magnetic Attractions Inc
Current Option E (Equity) Option D (Debt)
Debt 0 $0 $160
Interest 0 $0 $10
Tax Rate 40% 40% 40%
Price $0.80 N/A N/A
Shares Outstanding 400 600 400
A) $32
B) $48
C) $16
D) $30
E) $28
D
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