Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Second control work 5 variant 1 Q-35 % (ERTEPS analys) Four recent business school graduates have interested a group of proposed operation would consist of
Second control work 5 variant 1 Q-35 % (ERTEPS analys) Four recent business school graduates have interested a group of proposed operation would consist of equip- and throughout capitalists in backing a small business ent enterprise. The venture a series of retail outlets that would distribute and service a full line of ment. These stores would be located in northern Virginia, westerm Pe West Virginia. Two financing plans have been proposed by the graduates. Plan A is an all equity capital structure. Three million dollars would be raised by selling 60,000 shares of common stock. Plan B would involve the use of long-term debt financing. One million dollars would be raised by marketing bonds with an interest rate of 10 percent. Under this alternative, another $2 million would be raised by selling 40,000 shares of common stock With both plans, then $3 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, in that this proportion of financial leverage is thought to be a permanent part of the company's capital structure. The fledgling executives have decided to use a 40 percent tax rate in their analysis. a. Find the EBIT indifference level associated with the two financing proposals. 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)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started