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4. Emco Products has a present capital structure consisting

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4. Emco Products has a present capital structure consisting only of common stock (10 million shares). The company is planning a major expansion. At this time, the company is undecided between the following two financing plans (assume a 40 percent marginal tax rate): Plan 1 (Equity financing ). Under this plan, an additional 5 million shares of common stock will besold at $10 dollars each. Plan 2 (Debt financing). Under this plan, $50 million of 10 percentlong-term debt will be sold.
One piece of information the company desires for its decision analysis is an EBIT-EPS analysis.
a. Calculate the EBIT-EPS indifference point.
b. Graphically determine the EBIT-EPS indifference point.
c. What happens to the indifference point if the interest rate on debt increases and the common stock sales price remains constant?
d. What happens to the indifference point if the interest on debt remains constant and the common stock sale price increases?
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