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Moon and Chittenden are considering a new Internet venture

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Moon and Chittenden are considering a new Internet venture to sell used textbooks. The project requires $300,000 i financing. Two alternatives have been proposed:
Plan 1 (Common equity financing). Sell 30,000 shares of stock at a net price of $10 per share.
Plan 2 (Debt equity financing) Sell a combination of 15,000 shares of stock at a net price of $10 per share and $150,000 of long term debt as a pretax interest rate of 12%.
Assume the corporate tax rate is 40%
a. Compute the indifference level of EBIT between these two alternatives.
b. If the firm's EBIT next year has an expected value of $25,000, which plan would you recommend assuming maximizing EPS is a valid objective?
Submitted: 8 years ago.
Category: Homework
Expert:  Neo replied 8 years ago.
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