Abe forrester and three of his friends from college have

Reference no: EM13616454

Abe Forrester and three of his friends from college have interested a croup fo 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 Antonia. 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 $1.5 million dollars in long term bonds with an effective interest rate of 11.6% plus $0.8 million would be raised by selling 43,000 shares of common stock. The debt funds raised under Abe and his partners plan to use a 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 B is chosen.

Reference no: EM13616454

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