Question
(EBIT-EPS analysis) Bill and Kate Theil are not only husband and wife but entrepreneurs who have established three successful business. The proposed plan for their
(EBIT-EPS analysis) Bill and Kate Theil are not only husband and wife but entrepreneurs who have established three successful business. The proposed plan for their latest efforts involves a series of international retail outlets to distribute and service a full line if ingenious home garden tools. The stores would be located in high traffic cities on Latin America such as Panama City, Bogota, San Paulo and Buenos Aires. The entrepreneurs have proposed two financing plans. Plan A is an all common equity structure. Five million dollars would be raised by selling 160,000 shares of common stock. Plan B would involve the use of long term debit financing. Three million dollars would be raised by marketing bonds with effect interest rate of 14 percent. Under Plan B another $2 million would be raised by selling 64,000 shares of common stock. With both plans, $5 million is needed to launch the new firm's operations. The debt funds raised under PLAN B are considered to have no fixed maturity date because this portion of financial leverage is though to be a permanent part of the company's capital structure. The two promising entrpreneurs have decided to use 35 percent marginal tax rate in their analysis, and they have hired you on consulting basis to do the following:
1) Find the EBIT indifference level associated with the two financing proposals.
2) Prepare income statements for the two plans that prove EPS will e the same regardless of the plan chosen at EBIT level found in part (a).
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