Abe Forrester and three of his friends from college have interested a group of venture capitalist 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 millions dollars would be raised by selling 84,000 shares of common stock.
Plan B would involve issuing $1.3 millions dollars in long-term bonds with an effective interest rate of 11.6% plus $1.0 million woiuld be raised by selling 42000 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 parteners plan to use a 35% 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.
The EBIT indifference level associated with the two financing plans is (round to nearest dollar)
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
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