Question

In: Finance

 Abe Forrester and three of his friends from college have interested a group of venture capitalists...

 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:

•  Plan A is an​ all-common-equity structure in which $2.4 million dollars would be raised by selling 90,000 shares of common stock.

•  Plan B would involve issuing $1.3 million in​ long-term bonds with an effective interest rate of 11.7 percent plus another $ 1.1 million would be raised by selling 45,000 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 38 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.

Solutions

Expert Solution

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


Related Solutions

Abe Forrester and three of his friends from college have interested a group of venture capitalists...
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: Plan A is an all-common-equity structure in which $2.0 million dollars would be raised by...
Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea.
(Related to Checkpoint 15.2) (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...
EBIT-EPS analysis)  Abe Forrester and three of his friends from college have interested a group of...
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 ​$2.5 million dollars would...
(EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of...
(EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in​ Dallas, Houston, and San Antonio. To finance the new venture two plans have been​ proposed: • Plan A is an​ all-common-equity structure in which ​$ 2.3 million dollars...
Chin Hee and three of his friends from college have interested a group of venture capitalists...
Chin Hee 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 Kuantan, Ipoh, Kota Bharu and Johor. To finance the new venture two plans have been proposed: Plan A is an all-common-equity structure in which RM2,000,000 would be raised by selling...
​(Related to Checkpoint​ 15.2)  ​(EBIT-EPS analysis)  Abe Forrester and three of his friends from college have...
​(Related to Checkpoint​ 15.2)  ​(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: Plan A is an​ all-common-equity structure in which ​$2.2...
A group of your friends from college are planning to start a clothing line company. They...
A group of your friends from college are planning to start a clothing line company. They are in the process of writing their vision statement, mission statement, and values statement. They come to you for examples of companies’ statements you feel they could model theirs from. You offer to give them advice. Write a professional 1-page (300-350 word) email addressing the following areas: A company that has an ideal vision statement. Be sure to include the vision statement and explain...
Many entrepreneurial ventures raise money from venture capitalists. Getting venture capital funding is a complex process...
Many entrepreneurial ventures raise money from venture capitalists. Getting venture capital funding is a complex process of finding one or more partners to commit to back the company on its journey. The relationship between entrepreneurs and venture capitalists is important – it can be very positive and help a venture succeed, or it can be stressful and have negative implications. We will spend quite a bit of time trying to understand what venture capitalists do and how they structure deals...
From the Headlines—Tabula: Describe the role venture capitalists played in the founding and expansion of Tabula.
From the Headlines—Tabula: Describe the role venture capitalists played in the founding and expansion of Tabula. Comment on possible reasons for the involvement of multiple VC firms.
Financing Goals Small firms tend to raise funds from private investors and venture capitalists. As these...
Financing Goals Small firms tend to raise funds from private investors and venture capitalists. As these firms grow larger, they focus more on raising capital from the organized capital markets. Explain why this occurs.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT