A group fishermen have decided to form a new company that will produce a full line of fish squeezers that will revolutionize the fish cleaning process and make the exotic caviar harvesting more efficient. The group must raise $$2,500,000$ for their capital expenditures. Two financing plans are under consideration.

USE FORMULA AND EQUATIONS

DO NOT USE EXCEL

$*$ Plan A $-$ An all$-$equity plan that call for the issue of common shares that will be sold to net the company $$10$ per share.

$*$ Plan B $-$ A combination of debt and equity. Under plan B$,$ the company will issue $$1\mathrm{.}5$ million in $20-$year bonds that carry a $6$ percent coupon rate. The remaining investment will be through common shares at a net price of $$10$ per share.

The firm will be in the $42\%$ marginal tax bracket.

A$.$ Calculate the EBIT indifference point for the company using these two plans.

B$.$ You have determined that plan B is the best alternative for the company because the expected EBIT will exceed the crossover EBIT. If fixed costs are expected to be $25\%$ of the indifference EBIT, the contribution margin is $40\%$ of sales revenues and sales revenues are expected to be a $400\%$ markup of the indifference EBIT, construct the income statement and EPS for the company.

C$.$ Using the information form part $($b$),$ calculate the DOL, DFL and DCL for the firm.

D$.$ If sales change $($either increase or decrease$)$ by $20\%,$ what is the expected net income and EPS under the financing plan B$?$