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Finance - EBIT-EPS analysis Problem

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Question;(EBIT-EPS analysis) Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone.. Initially, the corporation will operate in the southern region of Tennessee, Georgia, NorthCarolina and South Carolina. A small group of private Investigators in Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration:- The first (Plan A) is an all-in common-equity capital structure. $2.3 million dollars would be raised by selling common stock at $10 per common share.- Plan B would involve the use of financial leverage. $1.4 million dollars would be raised by selling bonds with an effective interest rate of 10.6% (per annum), and the remaining $0.9 million would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be a permanent part of the firms capitalization, so no fixed maturity date is needed for the analysis. A 30% tax rate is deemed appropriate for the analysis.Question A: Find the EBIT indifference level associated with the two financing plans. (Round to the nearest dollar)Question B: A detailed financial analysis of the firm's prospects suggests that the long-term EBIT will beabove $303,000 annually. Taking this into consideration, which plan will generate the higher EPS?a. The EBIT indifference level associated with the two financing plans is $_. (round to the nearest dollar)b. Using EBIT of $303,000, complete the segment of the income statement for Plan A below. (Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)B. Prepare a pro forma income statement for the EBIT level solved for in PART A that shows the EPS will be the same regardless whether Plan A or Plan B is chosen.!stock Plan (A)IEBIT----Less: Interest Expense _Earnings Before Taxes _ Less: Taxes at 30%----Net Income _Number of Common Shares _ EPSUsing EBIT of $303,000, complete the segment of the income statement for Plan B below. (Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)!Bond/Stock Plan (B)IEBIT _Less: Interest Expense _ Earnings Before Taxes _Less: Taxes at 30% ----Net Income _Number of Common Shares _ EPS _The plan that will generate the higher EPS is Plan (A/B)?

 

Paper#48368 | Written in 18-Jul-2015

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