Question

Can you please show step by step and also how to do it on HP financial calculator.

This information will be used for two questions!

Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity. The firm has 500,000 shares of common stock outstanding. Sand Key is planning a major expansion and will need to raise $15 million. The firm must decide whether to finance the expansion with debt or equity. If equity financing is selected, common stock will be sold at $75 per share. If debt financing is chosen, 6% coupon bonds will be sold. The firm's marginal tax rate is 34%. Determine the level of operating income at which Sand Key would be indifferent between debt financing and equity financing.

the answer is $5,150,000 but idk how to do it

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ACTUALLY NO FORMULA IS THERE WHICH CAN BE ENTERED AND WE CAN SOLVE IN FINANCIAL CALCULATOR.

WE CAN SOLVE WITH SIMPLE STEPS AND SIMPLE CALCULATOR.

C w ? ENG 07:17 31-07-2020 99+ 28 х PR84 X fc . PJ PK PL PM PN PO PP PQ PR PS PT 65 OPTION 1 66 67 EXISTING STRUCTURE + NEW EQUITY NO OF SHARES ADDITIONAL SHARES TO BE ISSUED TOTAL NO OF SHARES 68 500000 200000 [15000000/75] 700000 EXISTING DEBT AT 10% 20000000 INTEREST = 2000000 69 70 71 72 73 74 75 OPTION 2 EXISTING STRUCTURE + NEW DEBT NO OF SHARES 500000 76 20000000 INTEREST = 2000000 EXISTING DEBT AT 10% NEW DEBT AT 6% TOTAL DEBT 77 78 15000000 INTEREST = TOTAL = 900000 2900000 35000000 79 80 81 NOW INDIFFERENCE POINT = BREAK EVEN LEVEL OF EBIT 82 83 84 OPTION 1 = OPTION 2 (EBIT- INTEREST) (1-t)/ NO OF SHARES = (EBIT- INTEREST) (1-t)/ NO OF SHARES (EBIT -2000000) (1-0.34)/ 700000 = (EBIT -2900000) (1-0.34)/ 500000 85 86 87 88 REMOVE (1-0.34) FROM BOTH SIDES (EBIT -2000000)/ 700000 = (EBIT-2900000)/ 500000 Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT an EAC MACRS RELEVANT STEIN indiffEPS EBIT OCF 1 LEA ... +

C w ? ENG 07:17 31-07-2020 99+ 28 х PR102 X fc . PJ PK PL PM PN PO PP PQ PR PS PT 79 80 81 NOW INDIFFERENCE POINT = BREAK EVEN LEVEL OF EBIT 82 83 84 85 OPTION 1 = OPTION 2 (EBIT- INTEREST) (1-t)/ NO OF SHARES = (EBIT- INTEREST) (1-t)/ NO OF SHARES (EBIT -2000000) (1-0.34)/ 700000 = (EBIT -2900000) (1-0.34)/ 500000 86 87 88 REMOVE (1-0.34) FROM BOTH SIDES (EBIT -2000000)/ 700000 = (EBIT -2900000)/ 500000 (EBIT -2000000) = (700000/500000) (EBIT -2900000) 89 90 91 92 (EBIT -2000000) = (1.4) (EBIT -2900000) (EBIT -2000000) = 1.4 (EBIT) - 4060000 0.4(EBIT) = 2060000 BREAK EVEN EBIT = 5150000 93 94 ANSWER 95 96 97 98 99 100 101 102 EAC MACRS RELEVANT Ml-np-ir BETA LEVERED NPV CCA REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEA ... +