Lt. Dan & Forrest Gump are best friends. They decide to start a corporation that is in the business of selling baseball caps emblazoned with logos to U.S. army veterans. The company is capitalized at $100,000 of pure equity. Dan & Forrest, the only 2 shareholders (2 shares of common stock total) contributed $50,000 each to the company. There is no debt or preferred stock.

The caps sell to the veterans for $3 each. Dan buys the caps from a Chinese supplier for $2 each. The caps come from China with the crest of the relevant army unit already emblazoned on the brim.

Recently Dan was contacted by his Chinese supplier who offered to sell Dan as many caps as Dan can use (up to 15,001 caps per year) for a fixed cost of $9,000/year. These caps would not have any logos on them, but Dan believes he can emblazon the caps himself for $1 per cap. Dan doesnt mind doing the work, but he frankly believes that Forrest will not be any help at all because Forrest is always too busy snacking on boxes of chocolates. As a result, Dan determines that he will not go forward with the newly proposed cost structure unless he can buy Forrest out of Forrests share of the company.

Forrest has indicated that he would be willing to sell his share of the company to Dan for his original $50,000 investment. Dan has approached Spearfish National Bank and the bank has indicated that it would lend Dan the $50,000 for an indefinite time period at 9% interest only (annual payments).

Dan has conducted a scenario analysis and believes that sales should average 10,000 caps per year, with 5,000 caps being a pessimistic forecast and 15,000 caps being an optimistic forecast. Dan believes each of these 3 scenarios is equally likely to occur (1/3 each).

A. The break-even point in cap sales (units) for the leveraged fixed cost proposal is _______________.

B. Calculate the relevant EBIT & EPS under each of the 3 sales volume scenarios described above for: 1. Dans current operation and 2. The proposed new operation. Please present a full pro-forma with all intermediate calculations. Please use blank page 2 of this 4-page document to answer this question.

C. Assuming that Dan is risk averse, should Dan go forward with buying out Forrest and utilizing the new Chinese fixed cost operation? Answer yes or no and provide a full paragraph detailing your reasoning. Please use lined page 3 of this 4-page document to answer this question.

D. A market research firm has informed Dan that of the 3 scenarios he has predicted, the average sales figure of 10,000 sales has a 95% probability of occurring, while both the optimistic and pessimistic scenarios only have a 2.5% chance each or occurring. Should this change Dans mind? Why or why not?