(EBIT-EPS analysis) Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North Carolina, and South Carolina. A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth the consideration:

• The first (Plan A) is an all-common-equity capital structure. $2.4 million dollars would be raised by selling common stock at $20 per common share.
• Plan B would involve the use of financial levearge. $1.3 million dollars would be raised by selling bonds with an effective interest rate of 10.5% (per annum), and the remaining $1.1 million would be raised by selling common stock at the $10 price per share. The use of financial leverage is considered to be a permanent part of the firms capitalization, so no fixed maturity date is needed for the analysis. A 35% tax rate is deemed appropriate for the analysis.

a. Find the EBIT indiffernce level associated with the two financing plans.

b. A detailed financial anylsis of the firm's prospects to suggest that the long-term EBIT will be aboce $321,000 annually. Taking into consideration, which plan will gernerate the higher EPS?