A firm has a projected EBIT of $20,000 for a new project. The funds ne

A firm has a projected EBIT of $20,000 for a new project. The funds needed for the project are $40,000. The firm can finance the project completely with debt at a pre-tax interest cost of 10%.

Alternatively, the firm could finance the project with equity by selling stock at $5 per share. If there are 500,000 shares outstanding and the firm’s tax rate is 40%, what is the EBIT-EPS indifference point?
A) $254,000
B) $504,000
C) $40,000
D) $20,000
E) $500,000

ANSWER

A