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: bullet
• Plan A is an? all-common-equity structure in which ?$2.42.4 million dollars would be raised by selling 84 comma 00084,000 shares of common stock. bullet.
• Plan B would involve issuing ?$1.31.3 million in? long-term bonds with an effective interest rate of 11.611.6 percent plus another $ 1.1$1.1 million would be raised by selling 42 comma 00042,000 shares of common stock. The debt funds raised under Plan B have no fixed maturity? date, in that this amount of financial leverage is considered a permanent part of the? firm's capital structure. Abe and his partners plan to use a 4040 percent tax rate in their? analysis, and they have hired you on a consulting basis to do the? following:
a. Find the EBIT indifference level associated with the two financing plans.
b. Prepare a pro forma income statement for the EBIT level solved for in part a that shows that EPS will be the same regardless whether Plan A or B is chosen.
a. The EBIT indifference level associated with the two financing plans is ?$ nothing. ?(Round to the nearest? dollar.)
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 $ Less: Interest Expense Earnings Before Taxes $ Less: Taxes at 40% Net Income $ Number of Common Shares EPS $ Complete the segment of the income statement for Plan B? below: ?(Round income statement amounts to the nearest dollar except the EPS to the nearest? cent.) Bond/Stock Plan EBIT $ Less: Interest Expense Earnings Before Taxes $ Less: Taxes at 40% Net Income $ Number of Common Shares EPS $