Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute full line of vacuum cleaners and accessories. These stores would be located in dallas, Houston and San Antonio. The finance the new venture two plans have been proposed:

Plan A is an all common equity structure in which 2.2 million dollars would be raised by selling 84,000 shares of common stock

Plan B would involve issuing 1.3 million in long term bonds with an effective interest rate of 12.4 percent plus another 0.9 million would be raised by selling 42,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity date, in that this amount of financial leverage is considered a permanent part of the firm's capital structure.

Abe and his partners plan to use a 40 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 options

b. prepare a pro forma income statement for the EBIT level solved for in part a that shows that EPS will be the same regardless whether A or B is chosen.