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Abe Forrester and three of his friends from college have interested a group of venture capital

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Question;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 $2.2;million dollars would be raised be selling 84,000 shares of common stock.;? Plan B would involve issuing $1.3 million dollars in;long-term bonds with an effective interest rate of 11.8% plus $.9 million would;be raised by selling 42,000 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 34% 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 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.

 

Paper#50585 | Written in 18-Jul-2015

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