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:

• Plan A is an​ all-common-equity structure in which ​$ 2.3 million dollars would be raised by selling 86,000 shares of common stock.

• Plan B would involve issuing ​$ 1.3 million in​ long-term bonds with an effective interest rate of 11.8 percent plus another $ 1.0 million would be raised by selling 43,000 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:

(Q) Find the EBIT indifference level associated with the two financing plans. (Round to the nearest​ dollar.)

Answer 1