Question

In: Finance

​(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 million dollars would be raised by selling 84,000 shares of common stock.

Plan B would involve issuing ​$1.2 million in​ long-term bonds with an effective interest rate of 11.8 percent plus another $ 1.0 million would be raised by selling 42,000 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 40 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


Related Solutions

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...
 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...
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...
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...
(​EBIT-EPS analysis​) A group of retired college professors has decided to form a small manufacturing corporation....
(​EBIT-EPS analysis​) A group of retired college professors has decided to form a small manufacturing corporation. The company will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an​ all-common-equity alternative. Under this​ agreement, 1.2 million common shares will be sold to net the firm $ 10 per share. Plan B involves the use of financial leverage. A debt issue with a​ 20-year maturity period will be privately placed. The debt...
​(​EBIT-EPS analysis​) Bill and Kate Theil are not only husband and wife but entrepreneurs who have...
​(​EBIT-EPS analysis​) Bill and Kate Theil are not only husband and wife but entrepreneurs who have established three successful businesses. The proposed plan for their latest effort involves a series of international retail outlets to distribute and service a full line of ingenious home garden tools. The stores would be located in​ high-traffic cities in Latin America such as Panama​ City, Bogotá,​ São Paulo, and Buenos Aires. The entrepreneurs have proposed two financing plans. Plan A is an all​ common-equity...
Four of your best friends from college are now mutual fund managers (maybe you should have...
Four of your best friends from college are now mutual fund managers (maybe you should have kept in touch after graduation).  The risk-free rate was 2 percent and the S&P 500 market risk premium was 10 percent for 2019.  Using the Capital Asset Pricing Model, provide the benchmark Security Market Line predicted return for each fund in 2019 and place them in the table below. Fund Manager 2019 Performance BETA StdDev Corr. SML Predicted Return Devo 8% 0.55 11% 25% Grodge 11...
Four of your best friends from college are now mutual fund managers (maybe you should have...
Four of your best friends from college are now mutual fund managers (maybe you should have kept in touch after graduation).  The risk-free rate was 2 percent and the S&P 500 market risk premium was 10 percent for 2019.  Using the Capital Asset Pricing Model, provide the benchmark Security Market Line predicted return for each fund in 2019 and place them in the table below. Fund Manager 2019 Performance BETA StdDev Corr. SML Predicted Return Devo 8% 0.55 11% 25% Grodge 11...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT