EBIT-EPS ANALYSIS Abe Forrester and three of his friends from college have intersted a group of venture capitalist in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line vaccum cleaners and accessories. These stories would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed.

a. PLAN A IS AN ALL-COMMON-eqiuty structure in which $2.1 million dollars would be raised by selling 90,000 shares of common stock.

b. Plan B would involve issuing $1.3 million in long term bonds with an effective interest rate of 12.3 percent plus another 0.8 million would be raised by selling 45,000 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 firms capital structure.

Abe and his partners plan to use a 38 percent tax rate in their analysis and they have hired you on a consulting basis to do the following

a. Find the Ebit indiference level associated with the two financing plans.

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 Plan A or B is chosen.

a. The EBIT indifference level associated with the two financing plans is $ round to nearest dollar

b. Complete the segment of the income statement for Plan A below round income statement to nearest dollar except EPS to nearest cent.

Stock plan

EBIT$

less Interest Expense

Earnings Before Taxes

less Taxes at 38%

net income$

Number of Common Shares

EPS$

Complete the segment of the income statement for PLAN B 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 38%

Net income

Number of Common Shares

EPS$