Related to Checkpoint15.2
Hello. If someone could please assist with the following, I would be very appreciative. Thank you.
(Related to Checkpoint15.2) (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 inDallas, Houston, and San Antonio. To finance the new venture two plans have beenproposed:
Plan A is anall-common-equity structure in which $2.1 million dollars would be raised by selling 82,000 shares of common stock.
Plan B would involve issuing $1.5 million inlong-term bonds with an effective interest rate of 12.3 percent plus another $0.6 million would be raised by selling 41,000 shares of common stock. The debt funds raised under Plan B have no fixed maturitydate, in that this amount of financial leverage is considered a permanent part of thefirm’s capital structure.
Abe and his partners plan to use a 34 percent tax rate in theiranalysis, and they have hired you on a consulting basis to do thefollowing:
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.