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Three recent graduates of the computer science program at the University of Tennessee are forming a company

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Question;1 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, North Carolina 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. $2.2 million dollars would be raised by selling common stock at $10 per common share. - Plan B would involve the use of financial leverage. $1.2 million dollars would be raised by selling bonds with an effect interest rate of 11.4% (per annum), and the remaining $1.0 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 34% 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 be above $320,000 annually. Taking this into consideration, which plan will generate the higher EPS?a. Find the EBIT indifference level associated with two financing plans.Plan APlan BNumber of ShareDebtDebt RateInterestTax RateIndifference EBITQuestion B: A detailed financial analysis of the firm?s prospects suggests that the long-term EBIT will be above $309,000 annually. Taking this into consideration, which plan will generate the higher EPS?Plan APlan BEBITLess: Interest ExpenseEarnings Before TaxesLess: TaxesNet Income (EBT- Taxes)Number Of Common SharesEPS

 

Paper#50785 | Written in 18-Jul-2015

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