Sunshine Candy Company's Capital Structure for the Past Year of Operation

Sunshine Candy Company's capital structure for the past year of operation is shown below.
First mortgage bonds at 12% $2,000,000
Debentures at 15% 1,500,000
Common stock (1 million shares) 5,000,000
Retained earnings 500,000
Total $9,000,000
The federal tax rate is 50%. Sunshine Candy Company, home-based in Orlando, wants to raise an additional $1 million to open new facilities in Tampa and Miami. The firm can accomplish this via two alternatives: (1) it can sell a new issue of 20-year debentures with 16% interest; or (2) 20,000 new shares of common stock can be sold to the public to net the candy company $50 per share. A recent study, performed by an outside consulting organization, projected Sunshine Candy Company's long-term EBIT level at approximately $6.8 million. Find the indifference level of EBIT (with regard to EPS) between the suggested financing plans.

Correct Answer:

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[(EBIT - 465,000)(0.5)]/1,020,000 =
[(EB...

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