16-7B. (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 a series of retail outlets that would distribute and service a full line of energy-conservation equipment. These stores would be located in northern California, western Nevada, and throughout Oregon. Two financing plans have been proposed by the graduates. Plan A is an all-commonequity capital structure. Five million dollars would be raised by selling 75,000 shares of common stock. Plan B would involve the use of long-term debt financing. Two million dollars would be raised by marketing bonds with an interest rate of 12 percent. Under this alternative, another

$3 million would be raised by selling 55,000 shares of common stock. With both plans, then,

$5 million is needed to launch the new firm's operations. The debt funds raised under plan B are considered to have no fixed marurity 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 a 40 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).