Brooks Corporation is financed with $32 million of 9% debt and $68 million of common equity. The firm has 1 million shares of common stock outstanding. Brooks needs to raise $25 million and is undecided between two possible plans for raising this capital: Plan A: Equity financing. Under this plan, common stock will be sold at $62.50 per share. Plan B: Debt financing. Under this plan, 11% coupon bonds will be sold. At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 34% marginal tax rate.

Brooks Corporation is financed with $32 million of 9% debt and $68 million of common equity. The firm has 1 million shares of common stock outstanding. Brooks needs to raise $25 million and is undecided between two possible plans for raising this capital: Plan A: Equity financing. Under this plan, common stock will be sold at $62.50 per share. Plan B: Debt financing. Under this plan, 11% coupon bonds will be sold. At what level of operating income (EBIT) will the firm be indifferent between the two plans? Assume a 34% marginal tax rate.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 17P

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