16-11A. (EBIT-EPS analysis) Four recent business school graduates have interested a group of venture capitalists in backing a small business enterprise. The proposed operation would consist of aseries of retail outlets that would distribute and service a full line of energy-conservation equipment.

These stores would be located in northern Virginia, western Pennsylvania, and throughout West Virginia. Two financing plans have been proposed by the graduates. Plan A is an all-commonequity capital structure. Three million dollars would be raised by selling 60,000 shares of common stock. Plan B would involve the use of long-term debt financing. One million dollars would be raised by marketing bonds with an interest rate of 10 percent. Under this alternative, another

$2 million would be raised by selling 40,000 shares of common stock. With both plans, then,

$3 million is needed to launch the new finn's operations. The debt funds raised under plan Bare considered to have no fixed maturity date, in that this proportion of financial leverage is thought to be a permanent part of the company's capital structure. The fledgling executives have decided to use a40 percent tax rate in their analysis.

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

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