Question

EBIT-EPS analysis)  Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in​ Dallas, Houston, and San Antonio. To finance the new venture two plans have been​ proposed: bullet  Plan A is an​ all-common-equity structure in which ​$2.5 million dollars would be raised by selling 88 comma 000 shares of common stock. bullet  Plan B would involve issuing ​$1.3 million in​ long-term bonds with an effective interest rate of 11.9 percent plus another $ 1.2 million would be raised by selling 44 comma 000 shares of common stock. The debt funds raised under Plan B have no fixed maturity​ date, in that this amount of financial leverage is considered a permanent part of the​ firm's capital structure. Abe and his partners plan to use a 34 percent tax rate in their​ analysis, and they have hired you on a consulting basis to do the​ following: a.  Find the EBIT indifference level associated with the two financing plans. b.  Prepare a pro forma income statement for the EBIT level solved for in part a that shows that EPS will be the same regardless whether Plan A or B is chosen.

Answer 1

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