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Related to Checkpoint15.2) (EBIT-EPS analysis) Abe Forrester and three of his friends from college have interested a group of venture capitalists in…

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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 in Dallas, Houston, and San Antonio. To finance the new venture two plans have been proposed:

•Plan A is an all-common-equity structure in which $2.3 million dollars would be raised by selling 86, 000 shares of common stock.

•Plan B would involve issuing $1.41 million long-term bonds with an effective interest rate of 12.3 percent plus another $ 0.9 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: a.  The EBIT indifference level associated with the two financing plans is $ ?
(Round to the nearest dollar.)

B 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

Minus- Interest Expense

Minus- Earnings before taxes

Minus- Taxes at 35%

 Net Income

Number of Common Shares

EPS

—————————————-

Complete Segment of Income Statement for Plan B Below

 EBIT                                          ____________

Less :Interest Expense         ____________

Earnings Before Taxes            ___________

Less : Taxes at 35%                   ____________

Net Income                                  _________

Number of Common Shares ____

EPS                           _______

 
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