16-8B. (EBIT-EPS analysis) A group of college professors has decided to form a small manufacturing corporation. The company will produce a full line of contemporary furniture. Two financing plans have been proposed by the investors. Plan A is an all-common-equity alternative.

Under this arrangement 1,200,000 common shares will be sold to net the firm $10 per share.

Plan Binvolves 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 9 percent and the principal borrowed will amount to $3.5 million. Under this alternative, another $8.5 million would be raised by selling 850,000 shares of common stock. The corporate tax rate is 50 percent.

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).

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

d. If a detailed financial analysis projects that long-term EBIT will always be close to

$1,500,000 alUlually, which plan will provide for the higher EPS?