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Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software
Three recent graduates of the computer science program at the University of Tennessee are forming a company that will write and distribute new application software for the iPhone. Initially, the corporation will operate in the southern region of Tennessee, Georgia, North Carolina, and South Carolina. A small group of private investors in the Atlanta, Georgia area is interested in financing the startup company and two financing plans have been put forth for consideration:
- The first (Plan A) is an all-common-equity capital structure. $2.3 million dollars would be raised by selling common stock at $20 per common 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 analysis.
- Find the EBIT indifference level associated with the two financing plans. (Round to the nearest dollar).
- A detailed financial analysis of the firm's prospects suggests that the long-term EBIT will be above $314,000 annually. Taking this into consideration, which plan will generate the higher EPS?
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