16-8A. (EBIT-EPS analysis) Three recent liberal arts graduates have interested a group of ven- ture capitalists in backing a new business enterprise. The proposed operation would consist of a series of retail outlets to distribute and service a full line of personal computer equipment. These stores would be located in southern New Jersey, New York, and Pennsylvania. Two financing plans have been proposed by the graduates. Plan A is an all-common-equity structure. Three million dollars would be raised by selling 75,000 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 effective interest rate of 15 percent. Under this alternative, another $2 million would be raised by selling 50,000 shares of common stock. With both plans, then, $3 million is needed to launch the new firm's operations. The debt funds raised under plan B are 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 a 34 percent tax rate in their analysis, and they have hired you on a consulting basis to do the following: 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) above. 15-7A. (Break-even point and operating leverage) Zeylog Corporation manufactures a line of com- puter memory expansion boards used in microcomputers. The average selling price of its fin- ished product is $180 per unit. The variable cost for these same units is $110. Zeylog incurs fixed costs of S630,000 per year. a. What is the break-even point in units for the company? b. What is the dollar sales volume the firm must achieve to reach the break-even point? c. What would be the firm's profit or loss at the following units of production sold: 12,000 units? 15,000 units? 20,000 units? d. Find the degree of operating leverage for the production and sales levels given in part (e) above. 11-8B. (Probability trees) Mac's Buffaloes, Inc., is considering expanding its operations into computer-based basketball games. Mac's Buffaloes feels that there is a three-year life associ- ated with this project, and it will initially involve an investment of $120,000. It also feels there is a 70 percent chance of success and a cash flow of $100,000 in year 1 and a 30 percent chance of failure" and a $10,000 cash flow in year 1. If the project "fails in year 1, there is a 60 percent chance that it will produce cash flows of only $10,000 in years 2 and 3. There is also a 40 percent chance that it will really fail and Mac's Buffaloes will earn nothing in year 2 and get out of this line of business, with the project terminating and no cash flow occurring in year 3. If, however, this project succeeds in the first year, then cash flows in the second year are expected to be $225,000, $180,000, or $140,000 with probabilities of 30, 50, and 20, respectively. Finally, if the project succeeds in the third and final year of operation, the cash flows are expected to be either $30,000 more or $20,000 less than they were in year 2, with an equal chance of occurrence. a. Construct a probability tree representing the possible outcomes. b. Determine the joint probability of each possible sequence of events