Bonds: $4,400,000, Preferred stock: $2,300,000, Common stock: $6,300,000
To finance the purchase, Ranch will sell 10-year bonds paying 6.5% per year at the market price of $1,067. Preferred stock paying $2.07 dividend can be sold for $24.03. Common stock for Ranch is currently selling for $55.85 per share and the firm paid a #3.08 dividend last year. Dividends are expected to continue growing at a rate of 5.4% per year into the indefinite future. If the firm’s tax rate is 30%, what discount rate should you use to evaluate the equipment purchase?
i. Find the EBIT indifference level associated with the two financing plans.
ii. Prepare a pro forma income statement for the EBIT level solved for in part i. that shows that EPS will be the same regardless whether Plan A or B is chosen.
i. Find the EBIT indifference level associated with the two financing plans
ii. A detailed financial analysis of the firm’s prospects suggests that the long-term EBIT will be above 336,000 annually. Taking this into consideration, which plan will generate the higher EPS?