Xtra-Terrestrial Landscapes needs to raise capital to finance an expan

Xtra-Terrestrial Landscapes 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 600 new shares at the current price. Under Option D, they will borrow $327 at 5% and no new equity will be issued. There are currently 1,000 shares outstanding, and the firm is debt-free. The tax rate is 40%. To help Xtra-Terrestrial Landscapes with its decision, what is the EBIT-EPS indifference point? Round to the nearest dollar.

Xtra-Terrestrial Landscapes
Current Option E (Equity) Option D (Debt)
Debt 0 $0 $327
Interest 0 $0 $16
Tax Rate 40% 40% 40%
Price $0.55 N/A N/A
Shares Outstanding 1,000 1,600 1,000

A) $43
B) $55
C) $88
D) $33
E) $47

ANSWER

A