A group of retired college professors has decided to form a small manufacturing corporation. The company 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,1.8 million common shares will be sold to net the firm $10 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 $5.4 million. The corporate tax rate is 47 percent.

a. What is the EBIT indifference level associated with the two financing proposals? (Round to the nearest dollar.) b. Fill in the blanks in the following income statement for plan A. Round the EPS to two decimal places and all other items to the nearest dollar. PLANA EBIT Less: Interest expenses Earnings before taxes (EBT) Less: Taxes at 47% (Type a whole number.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Type a whole number.) (Round to the nearest cent.) Net income Divide: Number of common shares Earnings per share (EPS) Fill in the blanks in the following income statement for plan B. Round the EPS to two decimal places and all other items to the nearest dollar. PLAN B EBIT Less: Interest expenses $ $ Earnings before taxes (EBT) Less: Taxes at 47% $ (Type a whole number.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Type a whole number.) (Round to the nearest cent.) Net income $ Divide: Number of common shares Earnings per share (EPS) $ c. The following graph is an EBIT-EPS analysis chart for this situation. Using the Point Drawing Tool on the palette, show the EBIT-EPS indifference point computed in part (a) in the chart. Plan B Plan A EPS 0 $0.58 $0 $0 $1.98 $3.96 FAITH d. If a detailed financial analysis projects that long-term EBIT will always be close to $2.48 million annually, which plan will provide for the higher EPS? (Select the best choice below.) O A. Plan A OB. Plan B a. What is the EBIT indifference level associated with the two financing proposals? (Round to the nearest dollar.) b. Fill in the blanks in the following income statement for plan A. Round the EPS to two decimal places and all other items to the nearest dollar. PLANA EBIT Less: Interest expenses Earnings before taxes (EBT) Less: Taxes at 47% (Type a whole number.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Type a whole number.) (Round to the nearest cent.) Net income Divide: Number of common shares Earnings per share (EPS) Fill in the blanks in the following income statement for plan B. Round the EPS to two decimal places and all other items to the nearest dollar. PLAN B EBIT Less: Interest expenses $ $ Earnings before taxes (EBT) Less: Taxes at 47% $ (Type a whole number.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Round to the nearest dollar.) (Type a whole number.) (Round to the nearest cent.) Net income $ Divide: Number of common shares Earnings per share (EPS) $ c. The following graph is an EBIT-EPS analysis chart for this situation. Using the Point Drawing Tool on the palette, show the EBIT-EPS indifference point computed in part (a) in the chart. Plan B Plan A EPS 0 $0.58 $0 $0 $1.98 $3.96 FAITH d. If a detailed financial analysis projects that long-term EBIT will always be close to $2.48 million annually, which plan will provide for the higher EPS? (Select the best choice below.) O A. Plan A OB. Plan B