Abe forrester and three of his friends from college have

Reference no: EM13381999

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 $2.2 million dollars would be raised by selling 86,000 shares of common stock.

*Plan B would involve issuing $1.3 million dollars in long-term bonds with an effective interest rate of 12.3% plus $0.9 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 38% 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 solve for in Part A. that shows EPS will be the same regardless whether Plan A or B is chosen.

Reference no: EM13381999

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