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Plan A is an all-common equity structure in which $2.2 million dollars

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Question;Plan A is an all-common equity structure in which $2.2 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 11.5% plus $0.9 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. Tax rate is 34%.a. Find the EBIT difference level associated with the two financing plans.b. Prepare a pro forma income statement for the EBIT level in part a. that shows that EPS will be the same regardless whether Plan A or B is chosen.

 

Paper#45154 | Written in 18-Jul-2015

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