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Rahm Robotics Inc (RRI) is considering a large investment of $20,000,000 in a new project....

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Finance

Rahm Robotics Inc (RRI) is considering a large investment of $20,000,000 in a new project. The company currently has $15,000,000 of 6% coupon bonds and 2,000,000 common shares outstanding. The tax rate is 40%. Discussions with an investment banker have assured the firm that the following options are feasible:

  • Option 1: Sell $20,000,000 worth of common stock at $50 per share.
  • Option 2: Issue $10,000,000 worth of 8% coupon bonds with a 30-year maturity, in addition to $10,000,000 worth of common stock at $50 per share.
  1. Calculate the EBIT indifference point for the 2 options. (10 marks
  3. RRI would like to consider using preferred stock in Option 2 rather than common stock. Debt would remain unchanged:
  • New Option 2: Issue $10,000,000 worth of 8% coupon bonds with a 30-year maturity, in addition to $10,000,000 worth of preferred stock at $50 per share with a dividend of 3% per year.
  • Option 1 will remain unchanged (see part (a)).

Calculate the new EBIT indifference point for the 2 options (5 marks)

I already know the answer for question a, which is $10500000

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