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Three recent graduates of the computer science program at the Univesity of Tennessee are forming a company that will write and distribute new application software
Three recent graduates of the computer science program at the Univesity of Tennessee are forming a company that will write and distribute new application software for the IPhone. Intially the corp. will operate in the southern region of Tennessee, Georgia, North Carolina and South Carolina. A small group of private investors in the Atlanta GA area is interested in financing the startup company and two financing plans have ben put forth for consideration. The first (Plan A) is an all common equity capital structure. $2.1 million dollars would be raised by selling common stock at $20 per common share. Plan B would involve the use of financial leverage. $1.4 million dollars would be raised by selling bonds with an effective interest rate of 11.3%(per annum) and the remaining $0.7 million would be raised by selling common stock at the $20 price per share. The use of financial leverage is considered to be a permanent part of the firm's capitalization, so no fixed maturity date is needed for the analysis. A 30% tax rate is deemed appropriate for the anaylsis. A. Find the EBIT indifference level associated with the two financing plans. B. A detailed financial analysis of the firm's prospests suggests that the long term EBIT will be above $341,000 annually. Taking this into consideration , which plan will generate the higher EPS? A. Find the EBIT indifference level associated with the two financing plans. The EBIT indifference level associated with the two financing plans is $
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