16-9A. (EBlT-EPS analysis) Two recent graduates of the computer science program at Ohio Tech are forming a company to write, market, and distribute software for various personal corn·

puters. Initially, the corporation will operate in Illinois, Indiana, Michigan, and Ohio. Twelve serious prospects for retail outlets in these different states have already been identified and committed to the firm. The firm's software products have been tested and displayed at several trade shows and computer fairs in the perceived operating region. All that is lacking is adequate financing to continue the project. A small group of private investors in the Columbus, Ohio, area is interested in financing the new company. Two financing proposals are being evaluated. The first

(plan A) is an all-common-equity capital structure. Four million dollars would be raised by sell·

ing stock at $40 per common share. Plan B would involve the use of financial leverage. Two million dollars would be raised by selling bonds with an effective inten;st rate of 16 percent (per annum). Under this second plan, the remaining $2 million would be raised by selling common stock at the $40 price per share. This use of financial leverage is considered to be a permanent part of the firm's capitalization, so no fixed maturity date is needed for the analysis. A 50 percent tax rate is appropriate for the analysis.

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

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) above.