(Related to Checkpoint 15.2)(EBIT-EPS analysis)Abe Forrester and three of his friends from college have interested a group of venture capitalists in backing their business idea. The proposed operation would consist of a series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be located in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed: bulletPlan A is an all-common-equity structure in which $2.3 million dollars would be raised by selling 86,000 shares of common stock. bullet

Plan B would involve issuing $1.4 million in long-term bonds with an effective interest rate of 12.3 percent plus another $.9 million would be raised by selling 43,000 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 firm's capital structure. Abe and his partners plan to use a 35% percent tax rate in their analysis, and they have hired you on a consulting basis to do the following:

a.Find the EBIT indifference 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 $nothing. (Round to the nearest dollar.)

b.Complete the segment of the income statement for Plan A below:

(Round income statement amounts to the nearest dollar except the EPS to the nearest cent.)

Stock Plan

EBIT $

Less: Interest Expense

Earnings Before Taxes

Less: Taxes at 35%

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 35%

Net Income

Number of Common Shares

EPS