A group of retired college professors has decided to form a small manufacturing corporation that will produce a full line of traditional office furniture. The investors have proposed two financing plans. Plan A is an all-common-equity alternative. Under this agreement, 1.6 million common shares will be sold to net the firm $15 per share. Plan B involves 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 11 percent, and the principal borrowed will amount to $3.6 million. The marginal corporate tax rate is 21 percent.

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

b. Prepare a pro forma 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 situation.

d. If a detailed financial analysis projects that long-term EBIT will always be close to $3.14 million annually, which plan will provide for the higher EPS?

e. If you were to present the results of your analysis found in part a through d, how would you summarize your findings to your employer?