1. Chin Hee 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 Kuantan, Ipoh, Kota Bharu and Johor. To finance the new venture two plans have been proposed:

• Plan A is an all-common-equity structure in which RM2,000,000 would be raised by selling 80,000 shares of common stock.
• Plan B would involve issuing RM1,000,000 in long-term bonds with an effective interest rate of 12 percent plus another RM1,000,000 would be raised by selling 40,000 shares of common stock. The debt fund raised under Plan B has no fix maturity date, in that this amount of financial leverage is considered a permanent part of the firms capital structure.

Chin Hee and his partners plan to use a 40 percent tax rate in their analysis, and they have hired you to do the following:

Required:

Find the break-even EBIT (earnings before interests and taxes) associated with the two financing plans.