AQ&Q has EBIT of $2 million, total assets of $10 million, stock holder’s equity of $4 million, and pretax interest expense of 10 percent.
a) What is AQ&Q’s indifference level of EBIT?
b) Given its current situation, might it benefit from increasing or decreasing its use of debt? Explain.
c) Suppose we are to AQ&Q’s average tax rate is 40 percent. How does this affect your answers to (A) and (B)?