Q 7 A group of housewives from a local neighborhood has decided to form a textile corporation. The company will produce a full line of knitted products for export. They came up with two different financing plans. Plan A is an all-common-equity alternative. According to this plan, 1,000,000 common shares will be sold to net the firm 20 dollar per share. Plan B involves the use of financial leverage. A debt issue with a 20 year maturity period will be privately placed. The debt issue will carry an interest rate of 10 percent, and the principal borrowed will amount to 6,000,000 USD. Under this alternative, another 14,000,000 USD would be raised by selling 700,000 shares of common stock. The corporate tax rate is 50 percent.

Required

a)Find the EBIT indifference level associated with the two financing proposals. (5 marks)

b)Prepare an analytical income statement that proves EPS will be the same regardless of the plan chosen at the EBIT level found in part (a). (5 marks)