Based on the price of the bonds to be issued, and the selling price of the shares, the indifference level of EBIT between the plans is $1,142,857.
Between issuing shares and issuing bonds, the one with the higher EPS will be<u> Issuing Bonds</u> with EPS of 0.59
<h3>What is the indifference level?</h3>
First find the number of shares if the plan is to issue shares:
= Current number of shares + New shares
= (2,400,000 value / Price per share) + (4,000,000 / $5 Price per new share)
= 2,000,000 shares
The interest if bonds are picked is:
= 12% coupon x Bond value
= 12% x 4,000,000
= $480,000
Assuming the indifference level is denoted as L, the indifference level is:
(L x ( 1 - tax rate) - Preference share dividends) / Outstanding shares if new shares are issued = ( (L - Interest) x (1 - tax rate) - Preference dividends) / Outstanding shares if bonds issued
(L x ( 1 - 30%) - 10,000) / 2,000,000 = ( ( L - 480,000) x ( 1 - 30%) ) / 1,200,000
L = $1,142,857
<h3>Which plan gives the higher EPS?</h3>
Issuing bonds:
= ( ( 1,500,000 - 480,000) x ( 1 - 30%) ) / 1,200,000
= 0.59
Issuing shares:
(1,500,000 x ( 1 - 30%) - 10,000) / 2,000,000
= 0.52
Find out more on Earnings Per Share (EPS) at brainly.com/question/11448221.
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