A group of retired engineering professors from Singapore Polytechnic has decided to form a small manufacturing firm that will produce a full line of automation equipment. The investors have proposed two financing options.

Plan A is an all-common-equity alternative. Under this plan, 1.2 million common shares will be sold to net the firm $25 per share.

Plan B involves the use of financial leverage. A debt issue with a 20-year maturity period will be privately placed. The debt issue will carry an interest rate of 12 percent, and the principal borrowed will amount to $9 million. The balance will be raised through an equity issuance of 700,000 common shares. The marginal corporate tax rate is 20 percent.

a. Find the EBIT indifference level associated with the two financing proposals.

b. Prepare a pro forma income statement that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part (a).

c. Prepare an EBIT-EPS analysis chart for this situation.

d. If a detailed financial analysis projects that long-term EBIT will be always close to $3.2 million annually, which plan will provide a higher EPS?