Abe Forrester and three of his friends from college have interested a group of venture capitalist in backing their business idea. The proposed operation would consist of series of retail outlets to distribute and service a full line of vacuum cleaners and accessories. These stores would be locate 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 2.5 million dollars would be raised by selling 82,000 common stock Plan B would involve issuing 1.3 Million dollars in long term bonds with an a effective interest rate of 11.8% plus $1.2 million would be raised by selling 41,000 share of common stock. The debt funds raised under plan B have no fixed maturity date, in that this amount of finance leverage is considered a permanent part of the firms capital structure ABE and his partners plan to use 40% 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 Plan B is chosen