Janess Corporation is an all equity firm with 500,000 shares outstanding. It is considering changing its capital structure to include debt. If it does, its shares will reduce to 375,000 and it will incur interest of $200,000. Given this information, calculate the indifference EBIT.

A) $800,000
B) $850,000
C) $875,000
D) $900,000
E) $925,000

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Kathryn Bolick · Accepted Answer

Final Answer : A, Explanation :  The indifference EBIT is the level of EBIT at which the firm is indifferent between its all-equity and debt-equity capital structures. At this level of EBIT, the value of the firm is the same under both capital structures.To calculate the indifference EBIT, we can use the following formula:Indifference EBIT = (Interest expense / (1 - Tax rate)) * (Number of shares outstanding before debt / Number of shares outstanding after debt)In this case, the interest expense is $200,000, the tax rate is 0%, the number of shares outstanding before debt is 500,000, and the number of shares outstanding after debt is 375,000.Plugging these values into the formula, we get:Indifference EBIT = (200,000 / (1 - 0)) * (500,000 / 375,000) = $800,000Therefore, the indifference EBIT is $800,000.

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