Answer:
The amount the firm considering borrowing is $244,725.74.
Explanation:
At the break-even point, we have:
Break-even EBIT / Number of shares under all-equity = (Break-even EBIT - Interest) / Number shares under lever option ..................... (1)
Substituting all the relevant values into equation (1) and solve for interest, we have:
$56,000 / 42,000 = ($58,000 - Interest) / 29,000
$1.33333333333333 = ($58,000 - Interest) / 29,000
$1.33333333333333 * 29,000 = $58,000 - Interest
$38,666.67 = $58,000 - Interest
Interest = $58,000 - $38,666.67
Interest = $19,333.33
Therefore, we have:
Amount of debt = Interest / Interest rate = $19,333.33 / 7.9% = $244,725.74
Therefore, the amount the firm considering borrowing is $244,725.74.
