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Abe Forester and 3 of his friends from college have interested a group of venture capitalists

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Question;Abe Forester and 3 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;$2.1 Million dollars would be raised by selling 82,000 shares of common stock.;Plan B would involve issuing 1.3 million dollars in long-term bonds with an;effective interest rate of 11.9% plus $0.8 million would be raised by selling;41,000 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. Able and his partners plan to;use a 40% 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 form income statement for EBIT level;solved for in part A that shows that EPS will be the same regardless whether;plan A or B is chosen. 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 the nearest dollar.

 

Paper#42195 | Written in 18-Jul-2015

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