Question
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
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 and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed:
Plan A is an all-common-equity structure in which $2.4 million dollars would be raised by selling 86,000 shares of common stock.
Plan B would involve issuing $1.4 million in long-term bonds with an effective interest rate of 12.2 percent plus another $1.0 million would be raised by selling 43,000 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 35 percent tax rate in their analysis, and they have hired you on a consulting basis to do the following:
a.What is the EBIT indifference level associated with the two financing plans? (Round to the nearest dollar.)
b.Complete the segment of the income statement for Plan A below:(Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)
Bond/Stock Plan |
|
EBIT | $ |
Less: Interest Expense |
|
Earnings Before Taxes | $ |
Less: Taxes at 35% |
|
Net Income | $ |
Number of Common Shares |
|
EPS | $ |
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